MASTER 

NEGATIVE 
NO.  95-82503 


17 


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Author: 


Guaranty  Trust  Company 
of  New  York 

Title: 

Acceptances 


Place: 


[New  York] 

Date: 

1920 


MASTER   NEGATIVE   # 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


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Acceptances 


SCHOOL  OF  BUSINESS 


1920 


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Guaranty  Trust  Company 
of  New  York 


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LIBRARY 


School  of  Business 


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Acceptances 


SCHOOL  OF  BUSINESS 


1920 


Guaranty  Trust  Company  of  New  York 

140  Broadway 


FIFTH    AVENUE    OFFICE 
Fifth  Avenue  and  44th  Street 

GRAND  STREET  OFFICE 
268     Grand    Street 


MADISON  AVENUE  OFFICE 
Madison  Avenue  and  60th  Street 


LONDON  PARIS  HAVRE  BRUSSELS 

LIVERPOOL  CONSTANTINOPLE 


ness 


OTTABANTr  jbust 


COPTHIGHT,   1920 


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Contents 


Foreword 


PAGB 


Trade  Acceptances 

Open  Account  and  Acceptance  Methods 
Compared 

General  Advantages  of  Trade  Acceptances 

Bank  Acceptances 

Advantages  of  the  Bank  Acceptance 

Acceptances  Under  the  Federal  Reserve  Act 

Acceptances  by  Member  Banks 

Acceptances  by  Corporations  Formed  Under 
the  Edge  Act 

EligibUity 

Discount  by  Federal  Reserve  Bank 

Discount  of  Bankers'  Acceptances 

Piurchase  of  Acceptances  by  Federal  Reserve 
Banks 


13 
17 
20 
25 

33 
38 

51 
55 
56 
65 


75 


Acceptances  Under  the  Laws  of  New  York        78 
Market  for  Acceptances  83 


i-- 


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3 


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Foreword 

This  booklet  contains  a  discussion  of  the 
use  and  advantages  of  trade  and  bankers' 
acceptances,  together  with  pertinent  rulings 
and  regulations  of  the  Federal  Reserve  Board 
which  are  deemed  to  be  of  interest. 

On  October  25,  1920,  the  Federal  Reserve 
Board  issued  revised  regulations  covering, 
among  other  things,  the  acceptance  of 
drafts  and  bills  of  exchange  by  member 
banks;  rediscounts  under  Section  13  of  the 
Federal  Reserve  Act;  open  market  purchases 
of  bills  of  exchange,  trade  acceptances,  and 
bankers'  acceptances  under  Section  14;  and 
operations  of  banking  corporations  formed 
under  the  Edge  Act.  These  regulations,  in  so 
far  as  they  apply  to  trade  and  bankers'  accept- 
ances, will  be  found  in  substance  in  this 
booklet. 


November,  1920. 


[5] 


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Acceptances 


'!,:• 


There  are  two  kinds  of  acceptances — Trade 
Acceptances  and  Bank  Acceptances. 

Trade  Acceptances 

Use  in  Europe 

In  Great  Britain  and  in  many  countries  of 
Continental  Europe  practically  every  com- 
mercial transaction  is  financed  by  means  of 
a  time  draft,  or  bill  of  exchange.  The  draft 
is  drawn  by  the  seller  of  the  merchandise  and 
presented  to  the  buyer,  who,  if  he  finds  it 
satisfactory,  writes  across  its  face  the  word 
"Accepted,"  signs  his  name,  and  returns  the 
draft  to  the  seller.  It  then  becomes  a  trade 
acceptance — a  sound,  circulating  medium  of 
finance  which  ordinarily  commands  a  low  rate 
of  interest  and  which  the  seller,  if  he  desires, 
may  discount  at  his  bank. 

Although  European  countries  have  long 
realized  the  many  advantages  of  the  trade 
acceptance  over  the  open  book  account  in 
financing  commercial  transactions,  merchants 
in  America  have  been  slow  to  grasp  and  utilize 

[7] 


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the  opportunities  offered  by  the  acceptance 
method. 

Not  an  Innovation  in  United  States 

The  use  of  the  trade  acceptance  in  Ihis 
country  prior  to  the  Civil  War  was  more  or 
less  general,  but  after  that  conflict,  the  in- 
creasing financial  disorganization    and    the 
risk  attending  the  granting  of  long  credits 
created  a  demand  for  cash  which  made  the 
cash  discount  system  so  popular  that  it  has 
since  continued  in  favor.     This  led  to  the 
open  book  account.    While  the  trade  accept- 
ance today  is  being  used  to  a  much  greater 
extent  than  a  few  years  ago,  goods  are  still 
bought  and  sold  largely  on  open  account. 

A  very  active  and  aggressive  propa- 
ganda is  being  carried  on  throughout  the  prin- 
cipal commercial  centres  of  the  country  in 
favor  of  trade  acceptances,  and  their  use  has 
considerably  increased.  Many  of  the  lead- 
ing commercial  and  industrial  concerns  have 
adopted  this  new  system  of  credit  and  most 
banks  are  inclined  to  purchase  such  two  name 
paper  arising  from  actual  commercial  trans- 
actions between  the  drawer  and  the  acceptor. 

[81 


t" 


Trade  Acceptance  Defined 

A  trade  acceptance  is  a  time  draft  or  bill 
of  exchange,  drawn  by  the  seller  of  goods  on 
the  buyer  for  the  purchase  price,  and  ac- 
cepted by  the  buyer,  payable  on  a  certain 
date  at  a  place  designated  on  the  face  of  the 
instrument.  A  trade  acceptance  amounts  to 
a  negotiable  guarantee  by  the  purchaser  of 
goods  that  at  a  specified  time  and  place,  he 
will  pay  the  purchase  price.  An  acceptance 
being  a  negotiable  instrument,  the  seller,  by 
means  of  it,  may  obtain  the  use  of  the  outlay 
it  represents  for  further  enterprises  by  selling 
it  to  his  bank. 

Distinguished  from  Sight  Draft  or 
Promissory  Note 

A  note  is  ordinarily  used  to  borrow  money 
or  to  settle  overdue  obligations.  A  trade 
acceptance  shows  on  its  face  that  it  is  drawn 
by  the  seller  on  the  purchaser  of  merchandise 
for  the  price  of  the  goods.  When  accepted, 
it  becomes  a  valid  promise  to  pay  on  a  speci- 
fied date,  a  negotiable  instrument  equally 
as  binding  upon  the  person  accepting  it 
as  his  promissory  note   would   be.    As  a 

[9] 


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trade  acceptance  is  an  obligation  of  the 
buyer  indorsed  by  the  seller,  the  bank  dis- 
counting it  is  secured  by  two  name  instead 
of  by  one  name  paper,  as  is  the  case  with  a 
promissory  note. 

Trade  and  bank  acceptances  are  instru- 
ments of  credit  which  should  be  employed  in 
the  financing  of  business  and  industry,  in 
the  moving  of  crops,  and  in  numerous  other 
ways,  and  American  merchants  should  make 
use  of  them  as  the  best  method  of  carrying  on 
both  their  foreign  and  domestic  trade. 

Method  of  Using 

The  seller  desiring  to  use  the  acceptance 
method,  in  making  out  an  invoice  for  a  sale 
of  goods,  forwards  with  the  invoice  a  time 
bill  or  draft  drawn  on  the  purchaser  for  the 
purchase  price,  payable  at  a  specified  date; 
or  where  the  buyer  makes  several  purchases 
of  small  amounts  during  the  month,  the  seller 
in  making  up  the  monthly  statement  for- 
wards with  it  a  draft  or  bill  made  out  for 
the  total  amount  due.  When  the  purchaser 
of  goods  receives  the  draft  or  bill  he  may  pay 

[10] 


it  at  once,  having  deducted  whatever  is  al* 
lowed  as  a  discount  for  prompt  payment  in 
cash,  or  lie  may  write  across  the  face  thereof 
the  date  and  the  words,  for  example,  "Ac- 
cepted— payable  at  Guaranty  Trust  Com- 
pany of  New  York."  The  buyer  then  signs 
his  name  and  returns  the  instrument  to  the 
seller.  The  latter  either  keeps  it  until  a  few 
days  before  it  matures,  when  he  sends  it  to 
his  bank,  which  makes  collection  from  the 

bank  at  which  the  instrument  is  payable,  or 
if  the  seller  desires  funds,  he  may  discount  it 
at  his  bank  or  sell  it  in  the  open  market 
through  an  acceptance  dealer. 

The  place  of  payment  is  at  the  oflSce  of  the 
buyer  of  the  goods,  namely,  the  acceptor,  if 
no  other  place  is  designated.  To  facilitate 
the  collection  of  trade  acceptances  the  paper 
should  be  made  payable  at  the  acceptor's 
bank,  and  the  banker  and  acceptor  should 
make  arrangements  so  that  maturing  accept- 
ances are  charged  to  the  acceptor's  account 
on  the  date  of  maturity.  In  most  states, 
however,  the  banker  may  automatically  charge 
maturing  acceptances  to  his  customer's 
account. 

[11] 


, 


V 


i 


[12] 


When  Not  to  be  Used 

In  countries  abroad  where  bills  of  exchange 
and  acceptances  have  reached  their  highest 
development  as  credit  instruments  and  cir- 
culating mediums,  it  has  been  the  custom 
that  they  shall  be  issued  for  commercial 
purposes  or  against  actual  business  trans- 
actions. They  should  represent  current  mer- 
chandise transactions  connected  with  the 
purchase  and  sale  of  goods,  and  should  not 
be  given  for  overdue  accounts  or  borrowed 
money.  The  custom  in  this  country  follows 
the  rulings  of  the  Federal  Reserve  Board 
respecting  eligibility  for  discount  and  pur- 
chase by  Federal  reserve  banks. 

Open  Account  and  Acceptance 
Methods  Compared 

Open  Account  Ties  up  Capital 

The  open  account  system  with  its  indefinite 
time  of  payment  is  a  business  habit  with 
many  disadvantages.  One  defect  is  that 
it  forces  the  seller  to  carry  the  financial 
burden  of  the  buyer.  The  open  account 
ties  up  the   seller's   invested    or   borrowed 

113] 


tl 


i 


capital  for  an  indefinite  period,  during  which 
he  receives  no  stated  compensation  for  it. 
The  trade  acceptance  does  not  lessen  the 
advantage   of   the   buyer.     He  obtains   his 
credit  for  a  definite  instead  of  an  indefinite 
period  of  time.   It  is  of  service  to  the  seller, 
for  if  he  happens  to  be  in  need  of  funds  he  can 
take  the  acceptance  to  his  bank  and  readily 
discount  it.    This  will  enable  him  to  have 
the  use  of  the  money.    The  bank— not  the 
seller-carries  the  credit,  and  all  parties  to 
the  transaction  are  placed  on  an  equitable 
basis. 

Trade  acceptances  are  not  meant  to  defer 
payment  in  ordinary  transactions  where  the 
buyer  usually  pays  cash  on  the  spot  or  within 
ten  days.  They  are  not  needed  when  busi- 
ness is  done  on  that  basis,  and  the  buyer 
is  not  forced  to  use  acceptances  if  he  prefers 
paying  cash  and  saving  the  discount  allowed 
for  cash  payments. 

Uncertainty  of  Open  Accounts 

As  assets,  open  accounts  are  neither  quick 
nor  sure.  They  are  frequently  slow  and  un- 
certain of  realization.   Even  the  best  of  them 

[14J 


>■      ^ 


are  seldom  marketable  for  more  than  fifty 
per  centum  of  their  face  value.  In  the  form 
of  eligible  trade  acceptances  accounts  may 
be  converted  into  cash  at  a  favorable  rate  of 
discount. 

Unreasonable  Extensions  of  Time 

A  disadvantage  of  the  open  account  system 
is  the  ease  with  which  payment  may  be  post- 
poned, thus  enabling  purchasers  to  abuse 
their  credit  by  putting  oflf  the  settlement  of 
their  obligations  for  long  periods  of  time 
without  ^en  paying  interest.  This  results 
from  the  fact  that  since  the  time  of  payment 
is  usually  not  fixed,  the  privilege  of  obtaining 
an  extension  is  regarded  as  a  matter  of 
course. 

Costliness  of  Open  Account  System 

The  open  account  is  costly.  The  expense 
involved  in  collecting  slow  accounts,  in  ex- 
tensions of  the  time  of  payment,  and  in  trade 
discounts — all  characteristic  of  the  open  ac- 
count system — constitutes,  in  the  aggregate, 
a  heavy  tax  on  business.  All  these  disad- 
vantages are  eliminated  by  the  use  of  the  trade 

[15] 


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i 


acceptance  which  gives  stability  to  commer- 
cial credit  and  transforms  deferred  obligations 
into  definite  assets  and  liabilities. 

Conveniences  of  Open  Account  Retained 

The  right  tojbake  partial  payments,  which 
is  one  of  this  conveniences  of  the  open  ac- 
count, may  be  arranged  with  the  bank;  and 
if  the  trade  acceptance  cannot  be  conven- 
iently met  by  the  customer  upon  its  maturity, 
the  merchant,  if  he  desires  to  help  him,  may 
do  so  by  taking  the  customer's  promissory 
note    with    interest.    Thus    the    merchant 
granting  the  extension  does  so  without  the 
loss  of  interest,  which  results  under  the  open 
account  system.    Since  trade  acceptances  are 
not  given  for  renewals  or  for  old  accounts, 
they  should  be  settled  with  notes  which  draw 
interest. 

Other  Disadvantages  Eliminated 

Among  other  disadvantages  of  the  open 
account  method  which  will  be  eliminated  by 
the  general  adoption  of  the  trade  acceptance 
may  be  mentioned  the  habit  of  over-buyingf 
and  over-selling,  the  returning  of  goods  and' 


[16  J 


'/• 


cancellation  of  orders  for  trivial  reasons,  the 
taking  of  unwarranted  discounts,  the  secret 
assignments  of  accounts  and  losses  from  un- 
collectible debts. 

General  Advantages  of  Trade 
Acceptances 

Business  Conditions  Improved 

The  trade  acceptance  releases  funds  tied 
up  in  outstanding  accounts,  and  invested 
capital  acquires  more  liquidity  under  a  system 
which  offers  negotiable  paper  in  place  of  non- 
negotiable  open  book  accounts.  Relations 
between  buyer  and  seller  are  vastly  improved 
by  paper  which  clearly  defines  their  respective 
rights  and  obligations,  and  extravagance  is 
checked  by  the  constant  reminder  to  the 
debtor  that  his  credit  is  apt  to  be  tested  at 
any  time. 

Advantages  to  the  Buyer 

The  buyer  derives  certain  advantages  from 
the  use  of  the  trade  acceptance.  It  develops 
in  him  the  habit  of  careful  buying,  enables 
him  to  judge  how  he  stands  financially  and 

[17] 


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what  he  can  do  with  his  capital,  and  it 
strengthens  his  credit.  He  is  able  definitely  to 
fix  the  dates  of  his  payments,  thus  develop- 
ing  a  habit  of  promptness  in  fulfilling  obli- 
gations. 

The  small  buyer  is  better  able  to  compete 
with  larger  firms  since  the  trade  acceptance 
gives  him  a  better  credit  rating  and  places 
his  business  on  a  definite  financial  basis, 
which  cannot  be  the  case  when  his  debts 
are  in  the  form  of  open  accounts  with  no 
means  of  ascertaining  when  they  will  be 
liquidated. 

Advantages  to  the  Seller 

Sellers  or  manufacturers  with  limited  capi- 
tal, by  the  adoption  of  the  trade  acceptance 
method,  avoid  the  necessity  of  heavy  borrow- 
ing, and  the  tying  up  of  their  capital  and 
borrowed  money  in  open  accounts,  and,  as 
their  operating  expenses  are  reduced,  their 
profits  are  accordingly  increased.  Moreover, 
the  merchant  can  estimate  with  a  consider- 
able degree  of  certainty  what  his  income  will 
be  from  month  to  month,  for,  with  its  fixed 
date  of  maturity,  payment  of  a  trade  ac- 

[18] 


>■  ^ 


I 


ceptance  can  usually  be  counted  upon.  A 
merchant  receiving  trade  acceptances  may 
discount  them  at  his  bank  and  thus  obtain 
the  immediate  use  of  funds  required  for  his 
business. 

The  practical  effect  of  the  ordinary  book 
account  is  to  burden  the  seller  with  the 
financing  of  the  customer's  business.  This 
not  only  ties  up  the  capital  of  the  seller, 
thus  narrowing  the  scope  of  his  business,  but 
also  weakens  his  financial  statement  because 
of  the  character  of  his  accounts.  By  de- 
manding trade  acceptances,  the  seller  is  able 
to  overcome  these  diflSculties,  since  eligible 
acceptances  are  considered  an  excellent  in- 
vestment for  banks,  and  may  be  readily 
negotiated. 

Advantages  to  the  Banker 

From  the  standpoint  of  a  banker,  the  trade 
acceptance  is  a  very  advisable  form  of  invest- 
ment, since  it  represents  sales  actually  made 
and  offers  paper  secured  by  two  names  in- 
stead of  by  one,  as  in  the  case  of  a  promissory 
note.  The  trade  acceptance  offers  security 
upon  which  the  banker  can  easily  borrow 

[19] 


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■  9 
■■*■ 


by  reason  of  the  fact  that  eligible  trade 
acceptances  may  be  rediscounted  at  any 
Federal  reserve  bank  at  favorable  rates  of 
interest.  Under  this  system,  banks  finance 
the  sales  of  goods,  whereas,  under  the  old 
system,  the  manufacturer  or  seller  was  forced 
to  do  this. 

The  bank,  also,  is  enabled,  through  the 
general  use  of  trade  acceptances,  to  ascertain 
more  readily  the  credit  of  its  customers  as 
well  as  their  business  methods. 

Bank  Acceptances 

Trade  and  Bankers' 

Acceptances  Distinguished 
Some  confusion  has  arisen  as  to  the  diflFer- 

ence  between  trade  acceptances  and  bankers' 
acceptances.  The  former  is  the  result  of  a 
transaction  between  the  buyer  and  seller;  the 
latter  the  result  of  the  granting  of  credit 
by  a  banker.  In  the  former  case,  it  is  the 
buyer  who  accepts  the  draft;  in  the  latter  it 
is  the  bank. 

Definition 

A  banker's  acceptance  is  defined  by  the 
Federal  Reserve  Board  as  "a  draft  or  bill  of 

[20] 


I 


exchange,  whether  payable  in  the  United 
States  or  abroad  and  whether  payable  in 
dollars  or  some  other  money,  of  which  the 
acceptor  is  a  bank  or  trust  company,  or  a 
firm,  person,  company,  or  corporation  engaged 
generally  in  the  business  of  granting  bankers' 
acceptance  credits." 

How  Acceptance  Credit  is  Extended 

In  other  words,  a  bank  acceptance  consists 
of  the  extension  of  the  bank's  Credit  to  a 
customer,  wherein  the  bank,  for  a  considera- 
tion, permits  the  customer  to  use  its  credit. 
This  credit  may  be  either  secured  or  unse- 
cured, depending  upon  the  business,  character 
and  financial  responsibility  of  the  applicant. 

Distinction  Between  a  Bank's 
Acceptance  and  its  Note 

According  to  an  opinion  of  the  counsel  of 
the  Federal  Reserve  Board,  when  a  member 
bank  of  the  Federal  Reserve  System  accepts 
a  draft  or  bill  of  exchange  drawn  against  it, 
it  enters  into  a  contract  substantially  similar 
to  that  of  the  maker  of  a  note,  so  that  while 
the  form  of  the  instrument  differs,  the  legal 

[21] 


I 


I  ■  1 

I! 


'ioil 


eflfect  is  the  same.  The  use  of  a  bank's 
acceptance,  however,  differs  from  the  use  of 
its  promissory  note.  When  a  bank  accepts 
a  draft  or  bill  of  exchange  for  one  of  its  cus- 
tomers, it  merely  lends  its  credit  responsi- 
bility to  its  customer  in  order  that  he  may 
procure  the  funds  elsewhere.  The  holder  of 
a  bank's  acceptance  has  the  same  legal  rights 
against  the  bank  as  the  holder  of  its 
promissory  note. 

Method  of  Using 

A  bank  acceptance  may  be  created  as 
follows : 

Richard  Brown,  in  New  York,  buys  of 
John  Doe,  in  Galveston,  a  quantity  of  mer- 
chandise. In  order  to  reimburse  John  Doe 
in  a  convenient  manner.  Brown  arranges  with 
his  bank  in  New  York  to  accept,  on  presenta- 
tion, the  drafts  of  John  Doe  with  documents 
attached.  Doe  thereupon,  under  the  terms 
of  the  sale,  draws  on  the  bank,  which  accepts 
the  drafts,  taking  possession  of  the  docu- 
ments. The  drafts  drawn  by  Doe  on  the 
bank  after  they  have  been  accepted  become 
bank   acceptances.     Then    ensues   a    credit 

[22] 


operation    between    the  bank    and   Richard 
Brown  to  determine  what  disposition  is  to 
be  made  of  the  documents  and  upon  what 
terms  the  bank  will  surrender  them.    This 
adjustment  is  easily  made.     The  bank  hav- 
ing agreed  to  pay  the  acceptances  when  they 
fall  due.  Brown  undertakes  to  provide  the 
bank  with  funds  for  that  purpose  prior  to 
the  maturity  of  the  acceptance.     (It  must 
be  borne  in  mind  that  the  bank  is  primarily 
liable  upon  its  acceptance,  and  that  the  se- 
curity for  its  acceptance  is  the  merchandise, 
which  is  the  basis  for  the  transaction.     The 
bank  also  has  the  guarantee  of  the  purchaser 
of  the  merchandise.) 

Commercial  Credit  Bills 

The  foregoing  case  describes  a  documentary 
bill.  Another  form  of  acceptance  is  created 
when  the  customer  draws  his  own  draft 
directly  on  the  bank,  and  the  bank  accepts 
it  for  payment  at  a  future  time.  Such  an 
acceptance  would  be  called  a  commercial 
credit  bill  and  might  be  secured  by  warehouse 
receipts  or  other  collateral,  or  simply  by  the 
general  credit  of  the  customer. 

[23] 


[24] 


S 

i 

I 


Advantages  of  the  Bank  Acceptance 

Bank  acceptances  offer  certain  distinct 
advantages  not  only  to  merchants  but  also 
to  the  banks  through  which  they  deal.  The 
specific  advantages  may  be  summarized  as 
follows: 

The  use  of  acceptances  makes  it  possible 
for  trust  companies  and  banks  to  finance 
legitimate  business  transactions  of  their  cus- 
tomers properly  and  conveniently. 

Banks  having  surplus  money  which  cannot 
readily  be  employed  at  the  time  may  invest 
it  in  prime  acceptances  which  may  either  be 
held  until  maturity  or  sold  in  the  open 
market,  should  such  action  be  necessary. 

Because  of  their  ready  marketability,  ac- 
ceptances of  well-known  institutions  will  be 
sought  more  and  more  as  short-term  invest- 
ments and  will  be  especially  valuable  as  such. 

Advantages  in  Foreign  Trade 

At  this  time,  when  we  are  striving  to 
further  develop  our  foreign  trade,  the  advan- 
tages of  the  acceptance  in  foreign  transac- 
tions are  worthy  of  especial  consideration. 

[25] 


i-M 


11 


Those  who  have  desired  to  engage  in  foreign 
trade  have  experienced  much  difficulty  in 
their  inability  to  grant  as  good  terms  of  credit 
as  have  been  accorded  foreign  buyers  by 
competitors  abroad.  It  has  been  the  practice 
of  many  American  exporters  to  require  pay- 
ment in  cash  at  New  York  against  documents, 
and  the  foreign  trade  of  this  country  has  thus 
been  handicapped.  This  difficulty  may  be 
overcome  by  the  use  of  bank  acceptances,  as 
the  credit  required  for  the  goods  may  be  estab- 
lished by  drawing  at  sixty  or  ninety  days'  sight 
on  a  New  York  accepting  bank  or  trust  com- 
pany, the  acceptance  being  discounted  at  the 
current  rate,  or  at  an  agreed  fixed  rate. 

Another  advantage  to  the  exporter  is  that 
he  is  immediately  reimbursed  for  the  value 
of  his  products  or  merchandise  and,  instead 
of  having  his  capital  tied  up  in  credits,  it  is 
released  for  re-employment  in  new  business. 

Acceptances  based  principally  on  the  com- 
modities exported  form  a  valuable  security. 
This  was  particularly  evidenced  in  London  at 
the  outbreak  of  the  war,  when  acceptances 
amounting  to  more  than  £500,000,000  were  in 
circulation.    The  greater  part  of  these  were 

[26] 


subsequently  liquidated  by  the  "self-liquidat- 
ing" process;  that  is,  by  the  sale  of  the  com- 
modity which  formed  the  basis  of  the  trans- 
action, thus  proving  the  soundness  of  the 
accepting  business  in  general. 

High  Class  of  Security 

The  standing  and  credit  of  the  accepting 
bank  make  the  paper  it  accepts  a  security  of 
the  highest  class.  The  bank  acceptance  at 
once  eliminates  the  necessity  and  trouble  of 
closely  investigating  the  drawer  or  the  in- 
dorsers,  as  the  primary  responsibility  rests 
with  the  accepting  bank.  If  its  credit  is 
good,  all  other  names  on  the  paper  may  be 
of  secondary  importance. 

Field  of  Buyer  Broadened 

Bank  acceptances  enhance  the  credit  and 
broaden  the  buying  field  of  the  merchant. 
By  means  of  a  letter  of  credit  from  his  bank 
to  the  effect  that,  under  certain  conditions 
and  up  to  a  certain  agreed  figure,  it  will  ac- 
cept all  bills  drawn  for  his  account,  the 
merchant  is  able  to  make  his  purchases  ad- 
vantageously, even  in  markets  where  he  is 

unknown. 

[27] 


il 


I 


i  i] 


p 


1 1 


Broadening  Market  for  Acceptances 

The  Sixth  Annual  Report  of  the  Federal 
Reserve  Board  covering  operations  for  the 
year  1919  says: 

"The  demand  for  bankers'  acceptance  credit  con- 
tinues to  increase  substantially  and  more  bills  are  being 
created  than  ever  before.  Freer  shipping  facilities  have 
promoted  larger  import  movements,  particularly  from 
South  America  and  the  Orient,  and  increased  com- 
modity prices  have  resulted  in  very  large  dollar  draw- 
ings from  those  markets.  The  increased  price  of  cotton 
this  year  also  has  required  much  greater  banking  accom- 
modation, which  has  largely  taken  bankers'  acceptance 
form,  with  the  result  that  many  new  names  have  ap- 
peared in  the  New  York  market  as  acceptors,  princi- 
pally of  banks  located  in  the  South  and  Southwest. 

"The  further  development  during  the  year  of  the 
business  of  accepting  corporations  and  foreign  trade 
banks  has  been  rapid.  At  the  end  of  the  year  such 
institutions  located  in  New  York  had  aggregate  capital 
and  surplus  in  excess  of  $38,802,000,  and  their  liabilitv 
for  acceptances  outstanding  was  approximately 
$90,000,000. 

"While  discount  houses  and  dealers  in  bills  have  en- 
deavored  strenuously  to  accomplish  distribution  of  this 
increased  volume  of  bills  and  in  the  main  have  been 
fairly  successful,  the  almost  constant  advance  in  money 
rates  made  their  task  increasingly  difficult.  Not  only 
have  they  had  to  carry  larger  portfolios,  often  requiring 

[28] 


.ir 


>^ 


for  that  purpose  funds  obtainable  only  at  rates  equal  to 
or  higher  than  those  earned  by  their  portfolios,  but  the 
higher  rates  for  call  money  on  investment  securities  at- 
tracted to  that  market  out-of-town  funds  that  would 
otherwise  have  been  at  the  service  of  commercial  re- 
quirements; and  during  the  latter  months  of  the  year, 
as  the  market  rates  for  bills  yielded  along  with  other 
rates  to  higher  levels,  there  developed  an  instability 
that  prevented  satisfactory  distribution.  Under  these 
circumstances  the  Federal  Reserve  Banks  absorbed  an 
increasing  amount  of  bills  in  the  open  market,  buying 
from  member  banks  and  dealers  alike  at  uniform  rates 
for  prime  indorsed  paper." 

«         «         9ie         *         4c 

"There  has  been  during  the  year  a  continuous  in- 
crease in  the  amount  of  open-market  purchases  of 
acceptances  made  chiefly  by  the  Federal  Reserve  Banks 
located  in  New  York  and  Boston,  which  cities  are  the 
principal  acceptance  markets. 

"The  Federal  Reserve  Banks  of  Cleveland,  Chicago, 
Minneapolis,  Kansas  City,  and  San  Francisco  have 
participated  daily  in  the  open-market  purchases  of  the 
Federal  Reserve  Bank  of  New  York  under  an  agreement 
approved  by  the  Federal  Reserve  Board.  Other  Fed- 
eral Reserve  Banks  have  undertaken  to  care  for  accept- 
ances originating  in  their  own  districts  which  have  been 
sold  in  the  New  York  market.  The  total  purchases  of 
acceptances  by  the  Federal  Reserve  Bank  of  New  York 
amounted  to  $1,950,898,000,     *     ♦     ♦    . 

"In  order  to  maintain  an  open  market  for  bankers' 

[29] 


m 
I 


I 


! 


acceptances  the  Federal  Reserve  Banks  of  Boston  and 
New  York  have  been  called  upon  constantly  to  make 
very  heavy  purchases,  and  it  has  been  necessary  for 
these  banks  in  order  to  sustain  their  reserves  to  make 
large  sales  of  acceptances.  Other  Federal  Reserve  Banks 
have  had,  from  time  to  time,  surplus  funds  and  with  the 
approval  of  the  Federal  Reserve  Board  have  purchased 
bankers'  acceptances  from  these  eastern  banks.  In 
cases  where  Federal  Reserve  Banks  have  of  their  own 
initiative  purchased  bankers'  acceptances  from  other 
Federal  Reserve  Banks  with  the  approval  of  the  Board, 
the  indorsement  of  the  selling  bank  has  not  been  given 
as  a  rule,  but  whenever  the  Board  has  requested  a  Fed- 
eral Reserve  Bank  to  rediscount  bankers'  acceptances 
for  another  the  selling  bank  has  been  required  to  indorse 
the  bills  sold. 

"The  Federal  Reserve  Banks  of  Cleveland,  Chicago, 
St.  Louis,  Minneapolis,  and  San  Francisco  are  the  only 
banks  which  have  neither  rediscounted  nor  sold  paper 
durmg  the  past  year.    Rediscount  operations  between 
Federal  Reserve  Banks  including  straight  purchases  of 
bankers'  acceptances  during  the  year  have  amounted 
to  $2,658,254,000,  as  compared  with  $660,638,000  dur- 
ing the  year  1918.    In  addition  to  these  transactions 
the  Federal  Reserve  Bank  of  New  York  has  purchased 
and  allotted  to  other  Federal  Reserve  Banks  $730,- 
866,000  of  bankers'  acceptances,  making  a  total  inter- 
district  movement  of  bills  discounted  and  acceptances 
purchased  and  allotted  to  other  Federal  Reserve  Banks 
of  $3,389,120,000." 

[30] 


The  tabular  statement  shown  on  page  32, 
of  acceptances  bought  by  Federal  reserve 
banks  during  the  past  five  years  shows  the 
enormous  increase  in  the  volume  of  the  ac- 
ceptance business. 

Discount  Rates  on  Trade  and 
Bankers^  Acceptances 

Bankers'  acceptances  are  regarded  by  the 
Federal  Reserve  Board  as  the  most  liquid  of 
all  investments,  and  consequently  it  has  usu- 
ally permitted  a  substantial  diflferential  in 
their  favor,  though,  of  course,  the  rates  of 
discount  are  subject  to  fluctuations  reflecting 
accurately  the  varying  conditions  of  the  money 
market.  A  preferential  rate  in  favor  of  trade 
acceptances,  also,  was  allowed  by  Federal 
reserve  banks  until  the  latter  part  of  1919. 
This  showed  the  oflScial  indorsement  of  the 
acceptance  system  of  credit.  Late  in  1919, 
however,  an  advance  in  discount  rates  was 
authorized  by  the  Board  which  eliminated 
the  differential,  at  least,  so  far  as  the  trade 
acceptance  was  concerned,  and  again  in  1920 
further  increases  in  rates  were  allowed  because 
of  conditions  in  this  country. 

[31] 


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Under  the  terms  of  the  Phelan  Act  of 
April  13,  1920,  provision  was  made  for  the 
application  of  graduated  rates  of  rediscount, 
rising  from  a  base  rate  to  be  established  at  the 
option  of  the  board  of  directors  of  a  Federal 
reserve  bank,  according  as  the  applications 
for  rediscount  filed  by  member  banks  ex- 
ceeded a  specified  or  base  line  to  which  the 
normal  or  basic  discount  rate  was  applicable. 
Since  the  adoption  of  the  Phelan  Act  the 
new  plan  has  been  put  into  eflFect  by  four 
Federal  reserve  banks. 

Acceptances  Under  the  Federal 

Reserve  Act* 

The  Federal  Reserve  Board  has  unquali- 
fiedly designated  trade  acceptances  as  a  fa- 
vored form  of  commercial  paper,  and  they  are 
eligible  for  discount  or  purchase  by  Federal 
reserve  banks  when  they  conform  to  the  re- 
quirements of  the  Federal  Reserve  Act  and  to 
the  regulations  of  the  Federal  Reserve  Board. 
In  order,  therefore,  that  much  of  the  misun- 

•Statements  contained  under  this  heading  are  based  on  the  Federal 
Reserve  Act,  regulations  of  the  Federal  Reserve  Board,  and  opinion^ 
of  Counsel  of  the  Federal  Reserve  Board. 

[33] 


t 

il 
^  I 


lili! 


4 


-^ 

t 


derstanding  and  uncertainty  which  has  tended 
to  discredit  the  merit  and  use  of  such  paper 
may  be  avoided,  the  trade  acceptance  should 
comply  with  the  rules  and  regulations  of  the 
Federal  Reserve  Board. 

Defined  by  Federal  Reserve  Board 

The  Federal  Reserve  Board  has  defined 
the  trade  acceptance  as  "a  draft  or  bill  of 
exchange  drawn  by  the  seller  on  the  pur- 
chaser of  goods  sold,  and  accepted  by  such 
purchaser."    The  word  "goods"  as  here  used, 
means  goods,  wares,  merchandise,  or  agri- 
cultural products,  including  live  stock.    The 
purchase  price  of  goods  plus  the  cost  of  labor 
in  eflfecting  their  installation  may  be  included 
in  the  amount  for  which  the  trade  acceptance 
is  drawn.   A  consignment  of  goods  or  a  con- 
ditional sale  of  goods  cannot  be  considered 
"goods  sold"  within  the  meaning  of  the  defini- 
tion of  a  trade  acceptance,  and  an  acceptance 
which  provides  that  the  drawer  is  to  retain 
title  to  the  goods  until  payment  of  the  accep- 
tance is  not  consistent  with  the  requirement 
of  a  legitimate  trade  acceptance  that  the 
title  shall  have  passed  to  the  drawee  at  the 

[34] 


i 


/. 


time  of  acceptance.  The  actual  sale  of  goods 
and  not  what  is  generally  termed  a  condi- 
tional sale  must  be  the  basis  of  the  acceptance. 
A  draft  or  bill  of  exchange  is  defined  by 
the  Federal  Reserve  Board  as  "an  uncondi- 
tional order  in  writing,  addressed  by  one  per- 
son to  another,  signed  by  the  person  giving  it, 
requiring  the  person  to  whom  it  is  addressed 
to  pay  in  the  United  States,  at  a  fixed  or 
determinable  future  time,  a  sum  certain  in 
dollars  to  the  order  of  a  specified  person." 

Qualifications  Essential 
to  Negotiability 

To  be  negotiable,  a  bill  of  exchange  must 
be  an  unconditional  order  to  pay  on  demand, 
or  at  a  fixed  or  determinable  future  time,  a 
certain  sum  of  money  to  order  or  to  bearer, 
and  if  payment  is  made  dependent  upon  a  con- 
dition or  contingency,  the  bill  becomes  condi- 
tional and  non-negotiable. 

A  general  acceptance  of  a  conditional  bill 
does  not  make  it  negotiable  and  a  conditional 
acceptance  of  an  unconditional  bill  destroys 
its  negotiability,  because  the  acceptance  is 
thereby  made  a  conditional  one.    A  qualified 

[35] 


"'I 

1 


.<,(  . 


f 


II  • 


or  conditional  acceptance  of  a  bill  of  exchange 
releases  the  drawer  and  prior  indorsers.  A 
bill  drawn  payable  "at  sight"  and  accepted 
payable  in  three  months,  has  been  held  to  be 
a  conditional  acceptance.  Likewise,  an  ac- 
ceptance to  pay  at  a  designated  place  different 
from  the  residence  of  the  acceptor,  when  the 
bill  stipulates  that  it  is  to  be  paid  there  and 
not  elsewhere,  quahfies  the  terms  of  the  bill 
and  renders  the  acceptance  conditional. 

The  drawer,  if  he  receives  notice  of  a  quali- 
fied acceptance,  should  express  his  dissent 
within  a  reasonable  time  thereafter,  otherwise 
he  will  be  deemed  to  have  assented  thereto. 

Reference  to  Particular 
Consignment 

If  payment  is  confined  to  the  proceeds  of 
a  particular  fund,  and  is  not  chargeable  to 
the  general  credit  of  the  drawer,  the  bill  is 
conditional  and  non-negotiable. 

Whether  reference  to  a  particular  consign- 
ment of  goods  renders  the  bill  conditional  has 
been  a  source  of  conflict  in  the  courts,  some 
holding  that  it  is  a  mere  indication  of  a  fund 
out  of  which  the  drawer  is  to  reimburse  hini- 

[36] 


;.-?,.*l 


^1  X 


self,  others  holding  that  the  bill  is  thereby 
made  conditional  because  limiting  payment 
to  proceeds  of  the  particular  shipment  men- 
tioned. A  reference,  however,  in  general 
terms  on  the  face  of  the  accepted  bill  to 
the  fact  that  it  is  based  on  exportation  or 
importation  of  goods  does  not  make  it  con- 
ditional and  impair  its  negotiability. 

Bills  made  payable  "in  exchange*'  are  not 
payable  "in  money,"  and  are  therefore  not 
negotiable,  A  provision  in  a  bill  that  it  is 
payable  with  interest  at  a  designated  rate 
per  annum  after  maturity  if  payment  is 
delayed,  does  not  impair  the  instrument's 
negotiability.  Likewise,  by  waiving  demand, 
notice,  and  protest  or  waiving  homestead 
exemption  rights,  the  negotiabilitj^  of  the  bill 
is  not  affected. 

Discharge  of  Drawer  and  Indorsers 

The  acceptor  is  the  principal  debtor  after 
acceptance.  Notice  of  demand  and  protest 
must  be  given  to  parties  secondarily  liable  in 
the  event  of  dishonor,  but  the  right  to  notice 
is  personal  and  can  be  waived  by  drawer  and 
indorsers,  the  waiver  having  no  effect  on 
the  acceptor  or  principal  debtor. 

[37] 


W 


n 


)  9^ 


The  drawer  and  indorsers  of  an  instrument 
made  payable  at  the  time  specified  in  the  bill 
are  not  released  by  failure  to  present  for 
acceptance,  unless  the  bill  expressly  provides 
that  it  must  be  presented  for  that  purpose, 
or  unless  it  is  made  payable  elsewhere  than 
at  the  place  of  business  or  residence  of  the 
drawee. 

Acceptances  by  Member  Banks 

Under  the  provisions  of  Section  13  of  the 
Federal  Reserve  Act,  as  amended,  member 
banks  are  permitted  to  accept  drafts  or  bills 
of  exchange  drawn  upon  them  which,  exclud- 
ing days  of  grace,  have  not  more  than  six 
months'  sight  to  run,  if  one  of  the  following 
conditions  is  present.   The  bill  must 

1.  Have  origin  in  a  transaction  involving  the  importa- 
tion or  exportation  of  goods,  or 

2.  Arise  from  a  transaction  involving  domestic  ship- 
ment of  goods  and  have  shipping  documents  at- 
tached  at  the  time  of  acceptance  secwing  or  convey- 
ing  title  to  the  goods,  or 

8.  Be  secured  at  the  time  of  acceptance  by  warehouse 
receipt  or  other  such  document  conveying  or  secur- 
ing title  to  readily  marketable  staples.* 


♦See  page  72. 


>^|>' 


[38] 


Bills  of  the  classes  above  designated  may 
be  accepted  by  member  banks  up  to  fifty 
per  centum  of  their  capital  and  surplus,  or, 
where  permission  is  obtained  from  the  Federal 
Reserve  Board,  up  to  one  hundred  per 
centum. 

The  aggregate  amount  of  acceptances  grow- 
ing out  of  domestic  transactions  may  not 
exceed  fifty  per  centum  of  the  capital  and 
surplus  of  any  member  bank.  This  condition 
which  is  attached  to  membership  in  the 
Federal  Reserve  System  relates  to  drafts  or 
bills  drawn  against  a  state  member  bank  in 
domestic  transactions  and  accepted  by  the 
latter,  but  not  to  drafts  drawn  by  an  indivi- 
dual against  another  drawee,  accepted  by  the 
drawee  and  discounted  by  a  state  member 
bank, 

A  member  bank  is  prohibited,  also,  from 
accepting  for  any  one  person,  firm,  company, 
or  corporation,  whether  in  a  foreign  or  domestic 
transaction,  drafts  or  bills  of  exchange  aggre- 
gating at  any  one  time  more  than  ten  per 
centum  of  the  capital  and  surplus  of  the 
member  bank.  The  latter  limitation  has  no 
application  where  the  accepting  bank  remains 

[39] 


M 


; 


f! 


I  ,  I : 

I     !  I 


ill 


Ait 


secured  either  by  attached  documents  or  other 
actual  security  arising  from  the  transaction 
covered  by  the  acceptance.  A  bill  of  lading 
draft  is  actual  security  even  after  the  docu- 
ments have  been  released,  provided  the  draft 
is  accepted  by  the  drawee  upon  or  before  the 
surrender  of  the  documents . 

If  the  aggregate  amount  of  drafts  accepted 
for  one  person,  firm,  company,  or  corporation 
exceeds  ten  per  centum  of  the  capital  and  sur- 
plus of  the  accepting  bank,  such  drafts  must 
remain  secured  throughout  their  lifetime  and 
the  security  cannot  be  released  unless  other 
actual  security  growing  out  of  the  same  trans- 
action as  the  acceptance  is  substituted  there- 
for. Theacceptingbankmay,however,  release 
the  security  where  the  total  amount  accepted 
for  any  one  customer  does  not  exceed  ten  per 
centum  of  its  capital  and  surplus. 

Acceptances  Up  to  One  Hundred 
Per  Centum 

The  Federal  Reserve  Board  has  provided 
that  any  member  bank  with  an  unimpaired 
surplus  equalling  at  least  twenty  per  centum 
of  Its  paid-up  capital,  desiring  to  accept  up 

[40] 


>^^>- 


to  one  hundred  per  centum  of  its  paid-up  and 
unimpaired  capital  stock  and  surplus,  may  file 
an  application  with  the  Board  through  the 
Federal  reserve  bank  of  its  district.    The  Fed- 
eral reserve  bank  then  reports  the  financial 
status  of  the  applying  bank  to  the  Board  and 
states  whether  the  business  and  banking  con- 
ditions in  the  district  are  such  as  to  make  the 
grantmg  of  the  application  advisable,  where- 
upon the  application  is  approved  or  rejected. 
Any  approved  application  may  be  rescinded 
by  giving  ninety  days'  notice  to  the  member 
bank. 

Dollar  Exchange 

Bills  drawn  on  member  banks  by  banks 
and  bankers  in  foreign  countries  or  depend- 
encies or  insular  possessions  of  the  United 
States  to  furnish  dollar  exchange,  where  the 
usages  of  trade  therein  make  it  necessary, 
may  be  accepted  by  the  former  to  an  amount 
not  in  excess  of  fifty  per  centum  of  their 
capital  and  surplus,  provided  such  drafts 
have  not  more  than  three  months'  sight  to 
run.  This  fifty  per  centum  limitation  is  en- 
tirely separate  from  and  not  included  in  the 

[41] 


tn  !i 


1 

■HhIji  ' 

! 

i 

m'M- 

1 

1 

1 

1 

1 

1 

;  '■ 

j 

I 

^ 

H       ! 

r 

■  l 

Ill  ! 

!l|' 
M 


'If. 


Ws  placed  by  the  Act  upon  the  acceptance 
by  a  mmber  bank  of  drafts  and  bills  of  ex- 
change  drawn  against  the  exportation,  im- 
portatK>n,  or  domestic  shipment  of  goods  or 
seciired  by  warehouse  receipts  covering  readily 
marketable  staples.  ^ 

The  ten  per  centum  limitation  referred  to 
on  page  39  on  the  acceptance  of  drafts  ap- 
Phes  to  those  drawn  to  furnish  dollar  exchange 
unless  accompanied  by  documents  conveying 
or  securing  title  or  by  some  other  adequate 
security.  m  <*tr 

In  order  that  a  draft  drawn  by  a  foreign 
bank  or  banker  on  a  member  bank  for  the 
purpose  of  furnishing  dollar  exchange  may  be 
accepted  by  the  latter,  the  drawer  must  be 
in  a  foreign  country  or  dependency  or  insular 
possession  of  the  United  States  where  the 
usages  of  trade  have  been  determined  by  the 
Federal  Reserve  Board  to  require  the  granting 
of  the  acceptance  facilities  applied  for.    Ap- 

stw  ?  Twl  ^"*  ^^  ^"^^  *«  *h-  Boa^d 
setting  forth  the  usages  of  trade  in  the  place 

where  the  drawer  bank  or  banker  is  located, 
ff  the  Board  deems  the  granting  of  the  ap- 
Phcation  expedient,  it  will  notify  the  member 

1421 


bank  of  its  approval  which,  however,  may  be 
revoked  upon  nmety  days'  notice  to  the  mem- 
ber bank.   The  Board  has  ruled  that  there  is 
nothing  in  the  provisions  of  Section  13  of  the 
Federal  Reserve  Act  which  can  be  construed 
to  permit  the  acceptance  by  member  banks 
of  drafts  drawn  merely  for  the  purpose  of 
correcting  adverse  exchange  conditions.    An 
application  will  not  be  granted,  therefore,  if 
it  appears  that  the  drafts  are  to  be  drawn  not 
because  the  usages  of  trade  so  require  but 
merely  because  dollar  exchange  is  at  a  pre- 
mitim  in  the  country  in  which  the  drawer  is 
located. 

Acceptances  Financing  Imports  or  Exports 
A  member  bank  may  accept  drafts  drawn 
for  the  purpose  of  importing  goods,  whether 
or  not  lie  sale  under  consideration  has  been 
consummated  at  the  time  of  the  acceptance, 
but  the  accepting  bank  must  be  reasonably 
sure  that  the  draft  is  drawn  to  finance  a  trans- 
action involving  importation  or  exportation 
of  goods,  that  its  proceeds  will  be  used  for 
that  purpose  and  that  there  is  a  definite,  bona 
fide  contract  for  shipment  within  a  reason- 

[43] 


:i|li 


!i 


lllljl 


m 


fi 


'III! 


aWe  and  specified  time     It  ff,. 

bank  believes  that  Z  f  ^'^''P*^"^ 

lately  be  used  sol.f  Z'"'!"^'  ^^^  "^t^*" 

Portation  ^ZTsTT'  ""'"""  ^"^  ^'"■ 
or  not  the  gooTs  W  h  "     ^^^^^^ 

--r.  that  the  goods  be  ide.;^rt:^ 

National  banks  cannot  accept  drafts  for 
the  purpose  of  enabhng  domestir  oT 
extend  credits  nn  ''''"^^st^c  concerns  to 

purchas^:^         '"  '^^°  ^^^-«*  to  foreign 

grafts  of  Persons  Doing  Both 

Export  and  Domestic  Business 

J^here  a  dealer  engaged  in  the  purchase  of 

the  same  character  and  class  J      T  , 

export  and  domestic  use,  tU  ff  ''^ 

thepurchaseandsaleofg^od  r L^^^^^^^^^^^ 
nis  agreement  with  a  mA«,k     u     ,  ^^orted, 

draf,.  should  show^rtrhl^'^P*-^ 
for  the  exportation  of  the  'I'ttT?* 
total  amount  of  drafts  dL^^*  *^^' 
credit  wiU  not  exceed  1  ""^'^  ^"^^^ 

involved  in  the  ZoH  "^^^^'^^'^  ^°^ount 

^  ^"^^^  contract,  that  the  pro- 
[44  J 


ceeds  of  the  drafts  are  to  be  used  in  connec- 
tion with  the  export  transaction,  and  that 
the  proceeds  of  the  sale  of  the  goods  exported 
will  be  applied  to  pay  acceptances,  unless 
the  dealer  has  meanwhile  provided  the  bank 
with  funds  to  meet  such  acceptances  at 
maturity,  or  has  properly  secured  them. 

Option  of  Dealers  to  Secure  Drafts 

A  dealer  having  drawn  drafts  accepted  by 
a  member  bank  in  an  export  transaction, 
should,  with  the  consent  of  the  accepting 
bank,  be  given  the  option  to  secure  such 
drafts  in  the  manner  required  of  bills  drawn 
in  domestic  transactions,  if  he  desires  to  use 
the  proceeds  derived  from  the  sale  of  the 
goods  exported  for  purposes  other  than  the 
payment  of  such  drafts. 

Guarantee  as  to  Exportation 

A  member  bank  cannot  accept  drafts  drawn 
by  an  exporter  in  a  foreign  country  to  provide 
funds  for  the  purchase  of  farm  products  from 
farmers  in  such  country  unless  the  foreign 
exporter  has  a  contract  to  ship  the  com- 
modities in  question  to  some  other  country. 
Unless  the  member  bank  has  a  guarantee  to 

[45] 


<v:*1 


i  :• 


i 


mmmmm 


*■ 


n^^  I 


this  efiFect,  the  transaction  is  not  one  involv- 
ing importation  or  exportation  of  goods,  and 
the  fact  that  the  foreign  exporter  intends  a 
sale  of  the  goods  in  a  foreign  country  is  not 
sufficient.  An  actual  contract  of  sale  must 
exist  and  it  must  appear  that  the  drafts  are 
merely  drawn  in  advance  of  the  actual  ship- 
ment of  goods  under  the  contract  of  sale. 

Miscarriage  of  Export  Transaction 

If  fully  secured,  a  member  bank  may  accept 
drafts  drawn  by  a  domestic  firm,  having  a 
contract  to  sell  to  foreign  buyers,  when  the 
transaction  is  made  in  good  faith,  though 
resulting  in  the  ultimate  sale  of  the  goods  to  an 
American  instead  of  to  a  foreign  purchaser. 

Maturity  to  Approximate 
Duration  of  Shipment 

Although  the  Act  fixes  a  maximum  matur- 
ity of  six  months,  yet  in  cases  where  a  draft 
is  drawn  against  a  shipment  of  goods  in  a 
transaction  not  involving  the  sale,  the  matur- 
ity of  the  draft  should  approximate  the  dura- 
tion of  the  transit  of  the  goods,  the  law  con- 


^i  ^ 


templating  that  the  acceptance  should  be 
to  finance  the  shipment  and  that  it  should 
not  be  the  means  of  furnishing  a  credit  for 
any  other  purpose. 

Where  a  draft  is  drawn  against  the  ship- 
ment of  goods  in  a  transaction  involving 
their  sale,  the  draft  may  be  drawn  and  ac- 
cepted for  the  purpose  of  financing  not 
merely  the  shipment  but  also  the  sale  of  the 
goods.  In  this  connection,  it  has  been  held 
that  a  draft  drawn  against  goods  shipped 
from  a  corporation  to  its  agent  may  be 
accepted  by  a  member  bank  even  though  no 
actual  sale  is  involved. 

Attached  Documents  in 
Domestic  Transactions 

The  provision  which  authorizes  member 
banks  to  accept  drafts  based  on  domestic 
shipments  of  goods  when  shipping  documents 
are  "attached,"  does  not  mean  that  the 
documents  must  be  physically  fastened  to 
the  draft.  Shipping  documents  must,  how- 
ever, be  made  out  or  indorsed  so  as  to 
convey  or  secure  title  to  the  accepting  bank. 

[47] 


Vvnai  0. 


Acceptance  of  Drafts  Secured  by 
Warehouse  Receipts 

No  draft  which  is  secured  by  a  warehouse 
receipt  should  properly  be  considered  eligible 
for  acceptance  under  the  terms  of  Section  13 
of  the  Federal  Reserve  Act  unless  the  goods 
covered  by  the  warehouse  receipt  are  being 
held  in  storage  pending  a  reasonably  imme- 
diate sale,  shipment,  or  distribution  into  the 
process  of  manufacture.  Any  draft,  therefore, 
which  is  drawn  to  carry  goods  for  speculative 
purposes  or  for  an  indefinite  period  of  time, 
without  the  purpose  to  sell,  ship,  or  manu- 
facture within  a  reasonable  time,  should  not 
be  considered  eligible  for  acceptance  under 
the  provisions  of  Section  13.  Such  a  draft 
would  be  merely  a  cloak  to  evade  the  restric- 
tions of  Section  5200  of  the  Revised  Statutes 
and  is  not  one  of  the  kinds  which  Congress 
intended  to  make  eligible  for  acceptance. 

Surrender  of  Documents 

Where  drafts  are  secured  by  warehouse 
receipts  it  may  be  necessary  at  some  period 
during  the  life  of  the  draft  for  the  receipt  to  be 
surrendered  to  the  customer  for  whom  the 

[48] 


acceptance  was  made,  in  order  that  the  trans- 
action involved  maybe  consummated,  and  it  is 
ordinarily  necessary  to  release  the  shipping 
documents  at  an  earlier  period  than  in  the 
case  of  warehouse  receipts,  but  in  any  event 
the  security  should  not  be  surrendered  until 
this  becomes  necessary.     When  the  docu- 
ments are  surrendered  the  bank  should  pro- 
tect itself  by  procuring  either  a  trust  receipt 
or  a  definite  agreement  on  the  part  of  the  cus- 
tomer to  whom  the  security  is  surrendered 
that  the  proceeds  derived  from  the  sale  of  the 
goods  represented  by  the  shipping  documents 
or  warehouse  receipts  will  be  deposited  with 
the  accepting  bank  when  available  to  pay  the 
draft  at  maturity  and  will  not  be  used  by  the 
customer  for  other  purposes.    Where  a  trust 
receipt  is  substituted  the  ten  per  centum  limi- 
tation applies  if  the  receipt  is  of  such  a  charac- 
ter as  to  give  access  to  or  control  over  the 
goods  to  the  customer  for  whom  the  draft  was 
accepted,  since  such  a  receipt  is  not  regarded 
as  "actual  security''  within  the  meaning  of 
Section  13  of  the  Federal  Reserve  Act. 

It  is  a  suflficient  compliance  with  the  terms 
of  the  Federal  Reserve  Act  if  shipping  docu- 

[49] 


* 


1. 


u 


ilJ 


r  > 


I :  I 


ments  are  ,n  the  possession  of  the  accepting 
bank  and  it  has  a  lien  on  the  property  repre 
sented  by  the  documents  at  the  time  the  bill 
IS  accepted  Where  placed  in  the  possession 
of  the  bank  s  agent  and  under  the  control  of 
the  bank,  such  documents  may  be  considered 
as  m  the  possession  of  the  bank. 

Purchase  by  Member  Bank  of 
Its  Own  Acceptances 

In  the  past  banks  were  accustomed  to  buy 
many  of  their  own  acceptances  because  it  w^ 

market  While  it  is  undesirable  in  the  opin- 
ion  of  the  Federal  Reserve  Board  for  a  bank 
to  buy  Its  own  acceptances,  it  is  essential  that 
the  credit  of  the  accepting  bank  be  protected 
through  such  purchase  where  the  market  con- 
ditions prevent  absorption. 

Purchase  by  a  bank  of  its  own  acceptances 
^  equivalent  to  a  loan  or  advance  to  the  cus- 
tomer  for  whom  the  acceptance  is  made,  and 
tite  habihty  of  the  customer  is  subject  to  the 
limitations  placed  on  loans.  The  power  of 
a  member  bank  to  accept  drafts  is  entirely 

[50] 


distinct  from  the  power  to  discount  accept- 
ances of  others. 

Member  banks  purchasing  their  own  ac- 
ceptances before  maturity  need  not  include 
them  in  the  aggregate  of  acceptances  author- 
ized by  the  Federal  Reserve  Act. 

Acceptances  by  Corporations  Formed 

Under  the  Edge  Act 

By  virtue  of  the  provisions  of  Section  25  (a) 
which  was  added  to  the  Federal  Reserve  Act 
on  December  24, 1919,  and  which  is  known  as 
the  Edge  Act,  any  corporation  formed  for 
the  purpose  of  engaging  in  international  or 
foreign  banking  or  other  international   or 
foreign  financial  operations  or  for  engaging 
in  such  operations  in  a  dependency  or  insular 
possession  of  the  United  States,  either  directly 
or  through  the  agency,  ownership,  or  control 
of  local  institutions  in  such  places,  may  accept 

(1)  Drafts  and  bills  of  exchange  drawn  upon  it  which 
grow  out  of  transactions  involving  the  importation 
or  exportation  of  goods,  and 

(2)  Drafts  and  bills  of  exchange  which  are  drawn  by 
banks  or  bankers  located  in  foreign  countries  or 

[51] 


I  f 


M' 


dependencies  or  insular  possessions  of  the  United 
States  for  the  purpose  of  furnishing  dollar  exchange 
as  required  by  the  usages  of  trade  therein. 

Except  with  the  approval  of  the  Federal 
Reserve  Board  and  subject  to  such  limitations 
as  it  may  prescribe,  no  such  corporation  may 

(a)  Exercise  its  power  to  accept  drafts  or  bills  of  ex- 
change  if  at  the  time  they  are  presented  for  accept- 
ances it  has  outstanding  any  debentures,  bonds, 
notes,  or  other  such  obligations  issued  by  it; 

(b)  Accept  any  draft  or  bill  of  exchange  which  grows 
out  of  a  transaction  involving  the  importation  or 
exportation  of  goods  with  a  maturity  in  excess  of 
six  months; 

(c)  Accept  any  draft  or  bill  of  exchange  drawn  for  the 
purpose  of  furnishing  dollar  exchange  with  a  matur- 
ity  in  excess  of  three  months. 

Limitations  on  Acceptances 

No  acceptances  may  be  made  for  the  ac- 
count of  any  one  drawer  in  an  amount  aggre- 
gating at  any  time  in  excess  of  ten  per  centum 
of  the  subscribed  capital  and  surplus  of  the 
accepting  corporation,  unless  the  transaction 
is  fully  secured  or  represents  an  exportation 
or  importation  of  commodities  and  is  guar- 

152] 


anteed  by  a  bank  or  banker  of  undoubted 

solvency. 

Whenever   the   aggregate   of   acceptances 

outstanding  at  any  time 

(a)  exceeds  the  amount  of  the  subscribed  capital  and 
surplus,  fifty  per  centum  of  all  the  acceptances  in 
excess  of  the  amount  must  be  fully  secured;  or 

(b)  exceeds  twice  the  amount  of  the  subscribed  capital 
and  surplus,  all  the  acceptances  outstanding  in 
excess  of  such  amount  must  be  fully  secured. 

The  corporation  may  elect  whichever  re- 
quirement (a)  or  (b)  calls  for  the  smaller 
amount  of  secured  acceptances.  In  no  event 
may  any  such  corporation  have  outstanding 
at  any  one  time  acceptances  drawn  for  the 
purpose  of  furnishing  dollar  exchange  in  an 
amount  aggregating  more  than  fifty  per 
centum  of  its  subscribed  capital  and  surplus. 

Reserves  Required 

Reserves  against  acceptances  must  be  in 
liquid  assets  of  any  or  all  of  the  following 
kinds:  (1)  cash;  (2)  balances  with  other 
banks;  (3)  bankers'  acceptances;  and  (4)  such 
securities  as  the  Federal  Reserve  Board  may 
from  time  to  time  permit. 

[53] 


\\ 


i  I     I , 


A  reserve  of  at  least  fifteen  per  centum 
must  be  maintained  against  all  acceptances 
outstanding  which  mature  in  thirty  days  or 
less  and  a  reserve  of  at  least  three  per  centum 
against  all  acceptances  outstanding  which 
mature  in  more  than  thirty  days. 

Liabilities  of  One  Borrower 

The  total  liabilities  to  any  corporation 
established  under  the  Edge  Act  of  any  person, 
company,  firm,  or  corporation  for  money 
borrowed,  including  in  the  liabiKties  of  a 
company  or  firm,  the  liabiKties  of  the  several 
members  thereof,  may  at  no  time  exceed  ten 
per  centum  of  the  amount  of  its  subscribed 
capital  and  surplus,  except  with  the  approval 
of  the  Federal  Reserve  Board.  The  discount, 
however,  of  bills  of  exchange  drawn  in  good 
faith  against  actually  existing  values  and  the 
discount  of  commercial  or  business  paper 
actually  owned  by  the  person  negotiating  the 
same  is  not  to  be  considered  as  money  bor- 
rowed within  the  meaning  of  this  provision. 
The  liabiKty  of  a  customer  on  account  of  an 
acceptance  made  by  such  a  corporation  for 
his  account  is  not  a  liability  for  money  bor- 

[54] 


rowed  within  the  meaning  of  this  provision 
unless  and  until  he  fails  to  place  the  corpo- 
ration in  funds  to  cover  the  payment  of  the 
acceptance  at  maturity  or  unless  the  corpo- 
ration itself  holds  the  acceptance. 

Aggregate  Liabilities  of  a  Corporation 

The  aggregate  of  any  such  corporation's 
liabilities  outstanding  on  account  of  accept- 
ances, average  domestic  and  foreign  deposits, 
debentures,  bonds,  notes,  guaranties,  indorse- 
ments and  other  such  obligations  may  not 
exceed  at  any  one  time  ten  times  the  amount 
of  the  corporation's  subscribed  capital  and 
surplus,  except  with  the  approval  of  the  Fed- 
eral Reserve  Board.  In  determining  the 
amount  of  the  liabilities  within  the  meaning 
of  this  provision,  indorsements  of  bills  of 
exchange  having  not  more  than  six  months 
to  run,  drawn  and  accepted  by  others  than 
the  corporation,  are  not  to  be  included. 

Eligibility 

A  bill  or  acceptance  is  said  to  be  "eligible" 
when  it  may  be  purchased  or  discounted 
by  a  Federal  reserve  bank.     In  order  to  be 

[55] 


ii 


ll  1 


III 


III 


i 


\<i 


eligible,  it  must  conform  to  aU  the  require- 
ments of  the  Federal  Reserve  Board,  since 
otherwise  it  cannot  be  purchased  or  dis- 
counted by  Federal  reserve  banks  and  will 
thereby  lose  one  of  its  greatest  assets. 

Discount  by  Federal  Reserve  Bank 
A  Federal    reserve   bank    may    discount 
for  any  of  its  member  banks  any  note,  draft, 
or  bill  of  exchange,  provided  it  has  the  follow- 
ing requisites : 

1.  It  must  have  a  maturity  at  the  time  of  discount  of 
not  more  than  ninety  days,  excluding  days  of  grace, 
but  where  drawn  for  agricultural  purposes*  or  based 
on  live  stock  it  may  have  a  maturity  of  not  more 
than  six  months. 

«.  It  must  have  arisen  out  of  actual  commercial  trans- 
actions,  namely,  it  must  be  an  instrument  drawn 
for  agricultural,  industrial,  or  commercial  purposes, 
or  the  proceeds  of  which  have  been  or  are  to  be 
used  for  such  purposes. 

S.  It  must  not  have  been  issued  to  carry  or  trade  in 
stocks,  bonds,  or  other  mvestment  securities,  ex- 
cept bonds  and  notes  of  the  United  States. 

4.  The  aggregate  of  notes,  drafts,  and  bills  bearing  the 
signature  or   indorsement  of  any    one    borrower, 

•See  definition  of  "Agricultural  Paper"  on  page  64. 

[56] 


whether  person,  firm,  company  or  corporation,  re- 
discounted  for  any  one  member  bank,  whether  state 
or  national,  must  not  exceed  at  any  time,  ten  per- 
centumf  of  the  unimpaired  capital  and  surplus  of 
such  bank,  this  restriction,  however,  not  applying 
to  the  discount  of  bills  of  exchange  drawn  in  good 
faith  against  actually  existing  values. 

5.  It  must  be  indorsed  by  a  member  bank. 

6.  It  must  conform  to  the  regulations  of  the  Federal 
Reserve  Board. 

No  Federal  reserve  bank  may  discount  for 
any  member  state  bank  or  trust  company 
any  of  the  notes,  drafts,  or  bills  of  any  one 
borrow^er  who  is  liable  for  borrowed  money  to 
such  state  bank  or  trust  company  in  an 
amount  greater  than  ten  per  centumj  of  the 

tUnder  the  terms  of  Section  1 1  (m)  as  amended  by  the  Act  of  March  3 , 
1919,  a  Federal  reserve  bank  may,  until  December  31,  1920,  rediscount 
for  any  member  bank,  whether  state  or  national,  notes,  drafts,  and  bills 
bearing  the  signature  or  indorsement  of  any  one  borrower  in  an  amount 
not  to  exceed  twenty  per  centum  of  the  member  bank's  capital  and  sur- 

glus,  provided  that  the  excess  over  and  above  ten  per  centum  be  secured 
y  not  less  than  a  like  face  amount  of  bonds  or  notes  of  the  United  States 
issued  since  April  24,  1917.  or  certificates  of  indebtedness  of  the  United 
states. 

tUnder  the  terms  of  Section  11  (m)  as  amended  by  the  Act  of 
March  3,  1919,  a  Federal  reserve  bank  may,  until  December  31,  1920, 
rediscount  for  a  member  state  bank  or  trust  company  paper  of  any  one 
borrower  secured  by  not  less  than  a  like  face  amount  of  bonds  or  notes 
of  the  United  States  issued  since  April  24,  1917,  or  certificates  of  in- 
debtedness of  the  United  States,  even  though  such  state  bank  or  trust 
company  may  already  have  loaned  to  the  borrower  under  his  regular 
line  of  credit  in  excess  of  the  ten  per  centum  limit  defined  above.  If, 
however,  the  member  state  bank  or  trust  company  has  loaned  to  one 
borrower  in  excess  of  that  ten  per  centum  Hmit  imder  his  regular  line 
of  credit  the  Federal  reserve  bank  can  not  rediscount  for  that  state 
bank  or  trust  company  any  of  the  paper  of  that  borrower  taken  under 
that  regidar  line  of  credit,  but  may  rediscount  any  paper  so  secured  by 
Government  obligations  of  the  kinds  specified  up  to  an  amount  not  in 
excess  of  twenty  per  centum  of  the  capital  and  surplus  of  such  state 
bank  or  trust  company. 

[57] 


ivi* 


..1 

i! 


II 


I'i 


till 


M 


1 


'1. 


I    ;  jj 


capital  and  surplus  of  that  state  bank  or  trust 
company,  but  in  determining  the  amount  of 
money  borrowed  from  the  state  bank  or  trust 
company,  the  discount  of  bills  of  exchange 
drawn  in  good  faith  against  actually  existing 
value  and   the  discount  of  commercial   or 
busmess  paper  actually  owned  by  the  person 
negotiatmg  the  same  is  not  to  be  included 
In  the  opinion  of  the  Board,  however,  ac- 
cepted demand  bills  on  which  the  drawer  is 
released  from  liability  are  not  "bills  of  ex- 
change" within  the  meaning  of  Section  13  and 
must,  therefore,  be  included  in  determining 
the  limits  on  the  amount  of  paper  of  any  one 
borrower  which  a  Federal  reserve  bank  may 
rediscount  for  any  member  bank. 

General  Character  of 
Eligible  Instruments 

The  Federal  Reserve  Board  has  determined 
that  the  mstrument  itself  to  be  eligible  for 
rediscount  at  a  Federal  reserve  bank  must 
meet  the  following  requirements: 

1.  It  must  be  an  mstrument  which  has  been  issued  or 
drawn  or  the  proceeds  of  which  have  been  used  or 
aft  to  be  used  in  the  first  instance,  in  producing,  pur- 

[58] 


chasing,  carrying,  or  marketing  goods  in  one  or  more 
of  the  steps  of  the  process  of  production,  manufac- 
ture, or  distribution,  or  for  the  purpose  of  carrying 
or  trading  in  bonds  or  notes  of  the  United  States. 
i.  Its  proceeds  must  not  have  been  used  nor  contem- 
plate use  for  permanent  or  fixed  investments  of  any 
kind,  such  as  lands,  buildings,  machinery,  or  for  any 
other  capital  purpose. 

3.  Its  proceeds  must  not  have  been  used  nor  contem- 
plate use  for  investments  of  a  purely  speculative 
character  or  for  the  purpose  of  lending  to  some  other 
borrower. 

4.  It  may  be  secured,  if  it  is  otherwise  eligible,  by  the 
pledge  of  goods  or  collateral  of  any  nature,  including 
paper,  which  is  ineligible  for  rediscount. 

Applications  for  Rediscount 

A  member  bank  must  make  application  for 
rediscount  to  the  Federal  reserve  bank.  A 
member  bank  must  furnish  with  all  applica- 
cations  for  the  rediscount  of  notes,  drafts  or 
bills  of  exchange,  its  certificate  to  the  effect 
that,  to  the  best  of  its  knowledge  and  belief, 
the  instrument  has  been  issued  or  drawn,  or 
its  proceeds  have  been  used  or  are  to  be  used 
in  the  first  instance,  in  producing,  purchasing, 
carrying  or  marketing  goods  in  one  or  more 

[59] 


h 


( 


l^ 


i\l\ ' 


'  1 1 

JJIJ! 


of  the  steps  of  the  process  of  production, 
manufacture,  or  distribution,  or  for  the  pur- 

of  the  Umted  States.  In  the  case  of  a  member 
state  bank  or  trust  company,  all  applications 
must  contain  a  certificate  or  guaranty  to  the 
effect  that  the  borrower  is  not  liable  and  will 
not  be  permitted  to  become  liable  during  the 
time  his  paper  is  held  by  the  Federal  reserve 
bank  to  such  bank  or  trust  company  for  bor- 
rowed money  in  an  amount  greater  than  ten 
per  centum  of  the  capital  and  surplus  of  the 
state  bank  or  trust  company. 

Evidence  of  Eligibility 

A  Federal  reserve  bank  must  take  what- 
ever steps  it  deems  necessary  to  satisfy  itself 
as  to  the  eligibility  of  the  draft,  bill,  or  trade 
acceptance  offered  for  rediscount  and  may 
require  a  recent  financial  statement  of  one  or 
more  parties  to  the  instrument.   The  instru 
ment  should  be  drawn  so  as  to  evidence  the 
character  of  the  underlying  transaction,  but  if 
It  IS  not  so  drawn  evidence  of  eligibility  may 
consist  of  a  stamp  or  certificate  affixed  by  the 

[60] 


acceptor  or  drawer  in  a  form  satisfactory  to 
the  Federal  reserve  bank. 

Syndicate  Paper 

Where  syndicates  are  formed  for  the  pur- 
pose of  granting  acceptance  credits  for  more 
than  moderate  amounts.  Federal  reserve 
banks  should  be  consulted  with  regard  to  the 
transaction  and  will  then  decide  the  question 
of  eligibility,  both  as  to  the  character  and 
amount  of  the  bill,  subject  to  the  approval 
of  the  Federal  Reserve  Board. 

Use  for  Commercial  or  Industrial  Purposes 
Where  the  proceeds  of  paper  have  been  or 
are  to  be  used  to  purchase  coal  or  to  provide 
funds   for   payment   of   other   expenses   of 
operation,  if  the  paper  is  otherwise  in  con- 
formity with  the  law,  and  the  regulations  of 
the  Board,  it  is  eligible  for  rediscount  at 
Federal    reserve    banks.     If    doubt    exists 
whether  the  proceeds  are  to  be  used  for  com- 
mercial or  industrial  purposes  or  whether  fbr 
permanent  or  fixed  mvestments,  then  the 
Federal  reserve  bank  may  accept  a  statement 
of  the  borrower  showing  a  reasonable  excess 

[61] 


^r 

4 

1 

HI  iitl! 

i. 

h 

■■fl 

^H" 

III'' 

\ 

pi^ 

1 

1 

Hi '" 

F 

l! 

! 

1 

' 

■'U  i| 

^^^^^^^1 

1      ;  1  'J 
m 
m          111 

ill 

H 

h 

il 

i 

of  quick  assets  over  current  liabilities  to 

«^ence  the  te  that  it  is  not  dra  J  I 
make  a  fixed  investment. 

Bills  Drawn  Against  Actually 
Existing  Values 

A  bai  of  exchange  discounted  before  ac 
ceptance  may  be  said  to  be  drawn  against 

Te  1  "^     r"^  '^^""^'^*^'  -  ---I^o-e 
receipts,  or  other  papers  securing  title  to  the 

goods  sold.     An  accepted  bill  of  exchangl 

unaccompanxed   by  shipping  documents  ! 

It     T\  ^T''  '""^  ^'  ^^°«^'d---i  a«  drawn 
agamst  actually  existing  value  if  drawn  again^ 

able  time  after  the  shipment  or  delivery  of 
t^e  goods.  In  the  latter  case,  there  must  be 
reasonable  grounds  for  belief  that  the  goods 
are  actually  in  existence  in  the  hands  Tthl 
drawee  m  their  original  form,  or  in  the  shape 
of  the  proceeds  of  their  sale. 

Bills  drawn  by  the  seller  against  the  pur- 
chaser and  accepted  before  the  sale  or  de- 
li very  of  the  goods  should  not  be  treated  as 
bills  drawn  against  actually  existing  values, 

[62J 


since  such  goods  are  not  in  the  possession  of 
the  drawee  either  in  their  original  form  or  in 
the  shape  of  the  proceeds  of  their  sale,  but 
where  the  goods  have  passed  out  of  the  posses- 
sion of  the  drawer  and  have  been  placed  in 
storage  subject  to  the  control  or  order  of  the 
drawee  a  different  situation  would  be  presented. 
If  a  trade  acceptance  is  drawn  at  the  time 
of  or  within  a  reasonable  time  after  the  sale 
and  delivery  of  the  goods,  when  there  is  rea- 
son to  believe  that  the  goods  are  in  the  posses- 
sion of  the  purchaser,  either  in  their  original 
form  or  in  the  shape  of  the  proceeds  of  the 
sale,  it  may  be  treated  as  a  bill  of  exchange 
drawn  against  actually  existing  value.   If,  how- 
ever, a  bill  is  drawn  for  the  purchase  price  of 
goods  sold,  in  order  to  convert  a  balance  car- 
ried on  open  account  into  a  negotiable  instru- 
ment, such  a  bill,  when  accepted,  might  com- 
ply with  the  Board's  definition  of  a  trade  ac- 
ceptance, but  could  not  be  treated  as  a  bill  of 
exchange  drawn  against  existing  value,  un- 
less drawn  within  a  reasonable  time  after  the 
sale  and  delivery  of  the  goods. 

[63] 


v 


j 


ik 


f 


^4 


Agricultural  Paper 

Six  months'  agricultural  paper  has  been 
declared  eh*gible  for  rediscount  at  a  Federal 
reserve  bank  if  it  conforms  to  the  regulations 
which  would  apply  if  its  maturity  were  ninety 
days  or  less,  instead  of  six  months.     The 
term  "six  months'  agricultural  paper**  has 
reference  to  a  note,  draft,  bill  of  exchange,  or 
trade  acceptance  drawn  or  issued  for  agri- 
cultural purposes,  or  based  on  live  stock.    It 
is  an  instrument  whose  proceeds  have  been 
used  or  contemplate  use  for  agricultural  pur- 
poses, including  the  breeding,  raising,  fatten- 
ing, or  marketing  of  live  stock,  and  which 
has  a  maturity  at  the  time  of  discount  of 
not  more  than  six  months,  exclusive  of  days 
of  grace. 


Paper  Covering  Sale  of 
Agricultural  Implements 

The  Federal  Reserve  Board  holds  that  the 
six  months' maturity  privilege  does  not  apply 
to  sales  by  a  manufacturer  of  agricultural  im- 
plements to  a  dealer  for  resale  by  him  to  a 
farmer  since  such  paper  must  be  treated  as 

[64] 


^^^mm 


commercial  and  not  as  agricultural  paper. 
It  therefore  cannot  be  rediscounted  with  a 
Federal  reserve  bank  if  it  has  a  maturity  of 
more  than  ninety  days. 

* 

Discount  of  Bankers'  Acceptances 

A  Federal  reserve  bank  may  rediscount  any 
banker's  acceptance  having  a  maturity  at  the 
time  of  discount  of  not  more  than  three 
months,  exclusive  of  days  of  grace,  which  has 
been  drawn  under  a  credit  opened  for  the  pur- 
pose of  conducting  or  settling  accounts  result- 
ing from  a  transaction  or  transactions  involv- 
ing any  one  of  the  following: 

1.  The  shipment  of  goods  between  the  United  States 
and  a  foreign  country,  or  between  the  United  States 
and  any  of  its  dependencies  or  insular  possessions, 
or  between  foreign  countries,  or 

2.  The  shipment  of  goods  within  the  United  States,  pro- 
vided shipping  documents  conveying  security  title 
are  attached  at  the  time  of  acceptance,  or 

3.  The  storage  of  readily  marketable  staples,  provided 
the  bill  is  secured  at  the  time  of  acceptance  by  ware- 
house, terminal,  or  other  similar  receipt,  conveying 
security  title  to  such  staples,  issued  by  a  party  inde- 
pendent of  the  customer,  and  provided  the  acceptor 
remains  secured  throughout  the  life  of  the  accept- 


ance. 


[65] 


■1 
» i 

i 


( 


|!| 


ii 


I" 


i! 


'I 

1^ 


.  A  Federal  reserve  bank  may  also  rediscount 
any  bill  drawn  by  a  bank  or  banker  in  a  for- 
eign country,  or  dependency  or  insular  pos- 
session of  the  United  States  for  the  purpose 
of  funjishing  dollar  exchange,  in  accordance 
with  the  regulations  relating  to  acceptances 
by  member  banks,  provided  the  bill  has  a 
maturity  at  the  time  of  discount  of  not  more 
than  three  months,  exclusive  of  days  of  grace. 
Evidence  as  to  Eligibility 

Federal  reserve  banks  must  be  satisfied 
from  the  acceptance  itself,  or  otherwise,  that 
it  is  eligible  for  rediscount.  The  bill  itself 
should  be  drawn  so  as  to  evidence  the  char- 
acter of  the  underlying  transaction,  but  if  it 
is  not  so  drawn  evidence  of  eligibility  may 
consist  of  a  stamp  or  certificate  affixed  by  the 
acceptor  in  a  form  satisfactory  to  the  Federal 
reserve  bank.* 

Transactions  Involving  Shipments  of 
Goods  in  Foreign  Trade 

It  is  not  necessary  that  shipping  documents 
covering  goods  in  the  process  of  shipment  be 

[66] 


attached  to  drafts  drawn  for  the  purpose  of 
financing  the  exportation  or  importation  of 
goods,  and  it  is  not  essential,  therefore,  that 
each  such  draft  cover  specific  goods  actually 
in  existence  at  the  time  of  acceptance,  but  it 
is  essential  as   a  prerequisite  to  eligibility 
either  that  shipping  documents  or  a  docu- 
mentary export  draft  be  attached  at  the  time 
the  draft  is  presented  for  acceptance.    If  the 
goods  covered  by  the  credit  have  not  been 
actually  shipped,  there  must  be  in  existence 
a  specific  and  bona  fide  contract  providing  for 
the  exportation  or  importation  of  such  goods 
at  or  within  a  specified  and  reasonable  time 
and  the  customer  must  agree  that  the  accept- 
ing bank  will  be  furnished  in  due  course  with 
shipping  documents  covering  such  goods  or 
with  exchange  arising  out  of  the  transaction 
being  financed  by  the  credit.   A  contract  be- 
tween principal  and  agent  will  not  be  con- 
sidered a  bona  fide  contract  of  the  kind  above 
required,  nor  is  it  enough  that  there  be  a  con- 
tract providing  merely  that  the  proceeds  of 
the  acceptance  will  be  used  only  to  finance  the 
purchase  or  shipment  of  goods  to  be  exported 
or  imported. 

[67] 


* 


■^ 


'       ,! 


n  > 


Where  a  transaction  against  which  a  draft 
IS  drawn,  involves  a  direct  sale  to  a  foreign 
purchaser,  the  fact  that  it  may  be  consum- 
mated  before  the  exportation  actually  com- 
mences is  immaterial,  if  the  transaction  is  bona 
fide  and  the  accepting  bank  has  no  reason  to 
beheve  that  thepurchaser  will  divert  the  goods 
from  their  foreign  destination. 

Storage  of  Readily  Marketable  Staples 

Where  a  bill  has  been  drawn  under  a  credit 
opened   for   the  purpose   of  conducting   or 
settlmg  accounts  resulting  from  a  transaction 
or  transactions  involving  the  storage  of  read- 
ily marketable  staples,  and  the  goods  must  be 
withdrawn  from  storage  prior  to  the  maturity 
of  the  acceptance  or  the  retirement  of  the 
credit,  a  trust  receipt  or  other  similar  docu- 
ment covering  the  goods  may  be  substituted 
m  heu  of  the  original  document,  provided 
such    substitution    is    conditioned    upon    a 
reasonably  prompt  liquidation  of  the  credit. 
In  order  to  insure  compliance  with  this  con- 
dition,  it  should  be  required,  when  the  orig- 
mal  document  is  released,  either  that  the  pro- 
ceeds of  the  goods  will  be  applied  within  a 

168] 


specified  time  toward  a  liquidation  of  the  ac- 
ceptance credit  or  that  a  new  document,  sim- 
ilar to  the  original  one,  will  be  resubstituted 
within  a  specified  time. 

Acceptances  in  Excess  of  Ten  Per  Centum 

In  order  to  be  eligible,  acceptances  for  any 
one  customer  in  excess  of  ten  per  centum  of 
the  capital  and  surplus  of  the  accepting  bank 
must  remain  actually  secured  throughout  the 
life  of  the  acceptance.   In  the  case  of  accept- 
ances of  member  banks  this  security  must 
consist   of   shipping   documents,   warehouse 
receipts  or  other  such  docimients,  or  some 
other  actual  security  growing  out  of  the  same 
transaction  as  the  acceptance,  such  as  docu- 
mentary drafts,  trade  acceptances,  terminal 
receipts,  or  trust  receipts  which  cover  goods 
of  such  a  character  as  to  insure  at  all  times  a 
continuance  of  an  effective  and  lawful  lien 
in  favor  of  the  accepting  bank.    Other  trust 
receipts  are  not  secured  within  the  meaning 
of  this  requirement  if  they  permit  the  customer 
to  have  access  to  or  control  over  the  goods. 

[69] 


I  J 


I' 


III 


1 


Maturity  of  Acceptance 

Although   a   Federal   reserve   bank   may 
legally  rediscount  an  acceptance  having  a 
maturity  at  the  time  of  discount  of  not  more 
than  three  months,  exclusive  of  days  of  grace, 
it  may  decline  to  rediscount  any  acceptance 
the  maturity  of  which  is  in  excess  of  the  usual 
or  customary  period  of  credit  required  to 
finance  the  underlying  transaction  or  which 
is  in  excess  of  that  period  reasonably  neces- 
sary to  finance  such  transaction.    Since  the 
purpose  of  permitting  the  acceptance  of  drafts 
secured  by  warehouse  receipts  or  other  such 
documents  is  to  permit  of  the  temporary 
holding  of  readily  marketable  staples  in  stor- 
age pending  a  reasonably  prompt  sale,  ship- 
ment, or  distribution,   no  such  acceptance 
should  have  a  maturity  in  excess  of  the  time 
ordinarily  necessary  to  eflfect  a  reasonably 
prompt  sale,  shipment,  or  distribution  into 
the  process  of  manufacture  or  consumption. 

Acceptance  Pledged  as  Collateral  Security 
Where  an  acceptance  house  purchases  an 
acceptance  based  on  the  importation  or  ex- 
portation of  goods  and  desires  to  reimburse 

[701 


itself  by  drawing  a  bill  upon  a  national  bank, 
the  acceptance,  which  was  based  upon  the 
transaction    involving    the    importation    or 
exportation  of  goods,  being  pledged  as  col- 
lateral security  for  the  bill,  the  new  bill 
cannot  be  said  to  grow  out  of  the  original 
export    transaction    in    the    sense    contem- 
plated in  the  Federal  Reserve  Act.    Hence,  a 
national  bank  cannot  accept  a  draft  drawn 
under  these  circumstances,  since  it  is  not  an 
acceptance   growing   out   of   a   transaction 
involving  the  importation  or  exportation  of 
goods,  and  because  it  is  not  an  acceptance 
of  that  class  authorized  by  the  amendment  of 
September  7,  1916.    It  is  not  drawn  by  a 
bank  or  banker  located  in  a  foreign  coimtry 
and  does  not  grow  out  of  a  transaction  involv- 
ing  the   domestic   shipment   or   storage   of 
goods. 
■  Readily  Marketable  Staples 

If  a  new  transaction  is  entered  into  after 
importation  has  been  completed,  it  would 
constitute  a  domestic  transaction,  in  which 
case  it  must  be  decided  whether  or  not  the 
goods  are  to  be  considered  "readily  market- 
able."   If  they  are,  the  acceptor  must  be 

[71] 


11 


I 


p 


p 


i; 


secured    by    warehouse    receipts    or    other 
documents.    A  readily  marketable  staple  is 
defined  as  "an  article  of  commerce,  agriculture 
or  industry  of  such  uses  as  to  make  it  the 
subject  of  constant  dealings  in  ready  markets 
with  such  frequent  quotations  of  price  as  to 
make  (a)  the  price  easily  and  definitely  as- 
certainable and  (b)  the  staple  itself  easy  to 
realize  upon  by  sale  at  any  tune. ' '  The  Federal 
Reserve  Board  suggests  that  although  the 
law  does  not  expressly  restrict  eligible  staples 
to  those  which  are  nonperishable,  neverthe- 
less, banks  as  a  matter  of  prudence  and  pro- 
tection to  themselves  should  not  consider  as 
eligible  any  staple  which  in  its  nature  is  so 
perishable  as  not  to  be  reasonably  sure  of 
maintaining  its  value  as  security  at  least  for 
the  life  of  the  draft  which  is  drawn  against  it. 

Drafts  Secured  by  Chattel  Mortgages 

The  Federal  Reserve  Board  has  ruled  that 
drafts  or  bills  of  exchange  drawn  in  domestic 
transactions  against  a  national  bank  cannot 
be  accepted  when  secured  by  a  chattel  mort- 
gage on  cattle,  but  only  when  accompanied  by 
shipping  documents  or  when  secured  by  a 

[72] 


warehouse   receipt   or   other   similar   docu- 
ments conveying  or  securing  title  to  readily 
marketable  staples.     While  cattle  may  be 
treated  as  readily  marketable  staples,  a  chat- 
tel mortgage  is  not  regarded  as  a  document 
similar  to  a  warehouse  receipt  since  the  bor- 
rower retains  the  possession  of  the  goods  and 
conveys  to  the  bank  only  the  legal  title.    The 
Federal  Reserve  Board,  having  concluded 
that  national  banks  and  member  banks  are 
not  authorized  to  accept  bills  secured  by  chat- 
tel mortgages  on  cattle,  has  deemed  it  advis- 
able that  Federal  reserve  banks  should  con- 
sider as  ineligible  bills  drawn  against  the 
security  of  such  chattel  mortgages,  whether 
accepted  by  member  or  non-member  banks. 

Discount  of  Renewals 

In  connection  with  the  discount  of  renewal 
acceptances,  the  Sixth  Annual  Report  of  the 
Federal  Reserve  Board  says : 

"Under  the  law  the  Board  appears  to  have  some  lati- 
tude of  discretion  in  the  matter  of  permitting  Federal 
Reserve  Banks  to  discount  renewal  acceptances,  and 
this  authority  was  granted  in  a  few  instances  and  for 
comparatively  small  amounts  during  the  war  and  im- 

[78] 


» 


■ 


mediately  following  the  cessation  of  hostilities.  The 
Board  had  repeated  applications  during  the  first  half 
of  the  year  for  authority  to  discount  renewal  accept- 
ances growing  out  of  various  foreign  transactions,  but 
has  consistently  declined  to  admit  the  eligibility  of 
renewals  except  in  cases  where  owing  to  delay  in  trans- 
portation or  for  other  reasons  it  was  clear  that  the  re- 
newal biU  would  meet  all  requirements  applicable  to  the 
original  acceptance,  and  that  the  goods  covered  by  the 
acceptances  were  still  in  existence  unconverted  in  form 
and  capable  of  ready  identification." 

While  a  national  bank  may  properly  enter 
into  an  agreement  having  more  than  six  months 
to  run  by  which  it  obligates  itself  to  accept 
drafts  of  the  kinds  made  eligible  for  accept- 
ance by  member  banks,  each  individual  draft 
accepted  under  the  terms  of  that  agreement 
must,  in  order  to  be  eligible,  conform  in  all  re- 
spects to  the  provisions  of  the  law  and  regu- 
lations of  the  Federal  Reserve  Board.    Inas- 
much as  each  individual  acceptance  must  itself 
conform  to  the  terms  of  the  law,  no  renewal 
draft,  whether  or  not  contracted  for  in  ad- 
vance, can  be  eligible  if  at  the  time  of  its  ac- 
ceptance the  period  required  for  the  conclusion 
of  the  transaction  out  of  which  the  original 
draft  was  drawn  shall  have  elapsed.     The 

174] 


question  of  the  eligibility  of  renewal  drafts, 
therefore,  must  necessarily  depend  upon  the 
stage  of  the  transaction  at  the  time  the  re- 
newal drafts  are  drawn. 


Purchase  of  Acceptances  by 
Federal  Reserve  Banks 

Federal  reserve  banks,  under  Section  14  of 
the  Federal  Reserve  Act,  may  purchase  and 
sell  in  the  open  market,  at  home  or  abroad, 
from  or  to  domestic  or  foreign  banks,  firms, 
corporations,  or  individuals,  bills  of  exchange 
and  bankers'  acceptances  of  the  kinds  and 
maturities  made  eligible  for  rediscount,  with 
or  without  indorsement  of  a  member  bank. 

General  Character  of  Eligible  Instruments 

The  Federal  Reserve  Board  has  ruled  that 
to  be  eligible  for  such  purchase  the  bill  or 
acceptance : 

1.  Must  conform  to  the  relative  requirements  of  the 
Board  covering  rediscounts,  except  that  a  banker's 
acceptance  growing  out  of  a  transaction  involving 
the  storage  within  the  United  States  of  goods  which 
have  been  actually  sold,  may  be  purchased,  provided 
the  acceptor  is  secured  by  the  pledge  of  such  goods 

175] 


a 


0    1 


liidl — •*' 


lilt  I 


and  provided  the  bill  conforms  in  other  respects  to 
the  relative  requirements  of  the  Board  regarding  re- 
discounts. 

2.  Must  have  a  maturity  at  the  time  of  purchase  of  not 
more  than  ninety  days,  exclusive  of  days  of  grace, 
unless  it  is  a  bill  drawn  on  a  banker,  when  it  may 
have  a  maturity  of  three  month^  exclusive  of  days  of 
grace. 

3.  Must  have  been  accepted  by  the  drawee  prior  to  pur- 
chase by  a  Federal  reserve  bank  unless  it  is  either 
accompanied  and  secured  by  shipping  documents  or 
by  a  warehouse,  terminal,  or  other  similar  receipt 
conveying  security  title  or  bears  a  satisfactory  bank- 
ing indorsement. 

Statements 

A  bill  of  exchange,  unless  indorsed  by  a 
member  bank,  is  not  eligible  for  purchase 
until  a  satisfactory  statement  has  been  fur- 
nished of  the  financial  condition  of  one  or  more 
of  the  parties  thereto. 

A  banker's  acceptance,  unless  accepted  or 
indorsed  by  a  member  bank,  is  not  eligible 
for  purchase  until  the  acceptor  has  furnished 
a  satisfactory  statement  of  its  financial  condi- 
tion in  form  approved  by  the  Federal  reserve 
bank  and  has  agreed  in  writing  with  a  Federal 

[761 


reserve  bank  to  inform  it  upon  request  con- 
cerning the  transaction  underlying  the  accept- 
ance. 

Drafts  Secured  by  Foreign 
Warehouse  Receipt 

A  draft  drawn  abroad,  payable  in  the  United 
States  in  dollars  and  secured  by  a  warehouse 
receipt  covering  readily  marketable  staples 
stored  in  a  warehouse  located  in  a  foreign 
country,  is  eligible  for  acceptance  by  a  mem- 
ber bank  and  after  acceptance,  is  eligible  for 
rediscount  by  Federal  reserve  banks  under 
the  provisions  of  Section  13  of  the  Federal 
Reserve  Act,  but,  under  the  terms  of  the 
Board's  present  regulations,  is  not  eligible  for 
purchase  by  Federal  reserve  banks  in  the  open 
market,  under  the  provisions  of  Section  14 
of  the  Federal  Reserve  Act. 

Acceptances  of  Non-Member 
Trust  Companies 

Bills  drawn  on  and  accepted  by  a  trust 
company  not  a  member  of  the  Federal 
Reserve  System,  where  the  proceeds  are  to 
be  used  for  purchasing  raw  material  or  in 

[77] 


"i»\ 
•••^j 


f\ 


Jii 


m 


Kit 


^h 


the  payment  of  labor,  where  the  goods  have 
not  been  sold  and  no  warehouse  receipt  or 
other  instrument  can  be  furnished,  are  in- 
eligible for  purchase  by  a  Federal  reserve 
bank. 

Acceptances  Under  the  Laws 
of  New  York 

New  York  State  Banking  Law 

The  New  York  State  Banking  Law  permits 
greater  latitude  than  does  the  Federal  Re- 
serve Act.  In  New  York,  state  banks  and 
trust  companies  may  issue  acceptances  with- 
out security  and  without  reference  to  the 
exportation  and  importation  of  goods. 

Section  185,  subdivision  10,  of  the  New 
York  State  Banking  Law  permits  a  trust 
company,  and  Section  106,  subdivision  2 
permits  a  state  bank 

"To  accept  for  payment  at  a  future  date  drafts 
drawn  upon  it  by  its  customers  and  to  issue  letters  of 
credit  authorizing  the  holders  thereof  to  draw  drafts 
upon  it  or  its  correspondents,  at  sight  or  on  time, 
not  exceeding  one  year." 

Section  108  relating  to  banks  and  Section 
190  relati^g  to  trust  companies  limit  the  lia- 

[78] 


"1    a 


bilities  resulting  from  extensions  of  credit  by 
means  of  letters  of  credit,  acceptance  of  drafts, 
or  discount  or  purchase  of  notes  or  bills  of 
exchange,  or  other  obligations  of  any  indi- 
vidual, partnership,  unincorporated  associa- 
tion, corporation  or  body  politic  to  ten  per 
centum  of  the  capital  stock  and  surplus  of 
such  bank  or  trust  company.  These  restric- 
tions do  not  apply  to  loans  to,  or  investments 
in  the  interest-bearing  obligations  of  the  United 
States,  the  State  of  New  York  or  any  city, 
county,  town  or  village  of  such  State. 

Institutions  in  Boroughs  with 
Population  of  Two  Millions 

Where  the  bank  or  trust  company  is  located 
in  a  borough  having  a  population  of  two  mil- 
lions or  over,  its  loans  to  any  state,  other  than 
the  State  of  New  York,  or  to  any  foreign 
nation,  or  municipal  or  railroad  corporation, 
subject  to  the  jurisdiction  of  a  public  service 
commission  of  New  York  State,  may  equal 
but  not  exceed  twenty-five  per  centum  of  the 
capital  and  surplus  of  the  lending  institution. 

It  may,  likewise,  lend  to  any  individual, 
partnership,  unincorporated  association,  or  to 

[79] 


I'   'I 


\j:M 


any  other  corporation  or  body  politic  amounts 
not  exceeding  twenty-five  per  centum  of  its 
capital  and  surplus,  but  the  liabilities  or  loans 
in  such  case  must  be  upon  drafts  or  bills  of 
exchange,  drawn  in  good  faith  against  actu- 
ally existing  values,  or  upon  commercial  or 
business  paper  actually  owned  by  the  person 
negotiating  same  to  the  lending  institution, 
and  be  indorsed  by  such  person  without  limi- 
tation; otherwise  such  liabilities  in  excess  of 
ten  per  centum  of  the  capital  and  surplus  and 
not  in  excess  of  an  additional  fifteen  per 
centum,  must  be  secured  by  collateral  having 
an  ascertained  market  value  of  at  least  fifteen 
per  centum  more  than  the  amount  of  liabili- 
ties secured. 

Other  Institutions 

It  the  bank  or  trust  company  is  located  else- 
where in  the  State,  its  loans  to  any  state,  other 
than  the  State  of  New  York,  or  to  any  foreign 
nation  or  a  municipal  or  railroad  corporation  or 
corporation  subject  to  the  jurisdiction  of  a 
public  service  commission  of  New  York  State 
may  equal  but  not  exceed  forty  per  centum 
of  the  capital  and  surplus  of  such  institution. 

[80] 


f 


The  total  liabilities  to  such  institution  of 
any  individual,  partnership,  unincorporated 
association,  or  of  any  other  corporation  or 
body  politic  may  equal  but  not  exceed  forty 
per  centum  of  the  capital  and  surplus  of  such 
institution,  but  the  liabilities  or  loans  in  such 
case  must  be  upon  drafts  or  bills  of  exchange 
drawn  in  good  faith  against  actually  existing 
values,  or  upon  commercial  or  business  paper 
actually  owned  by  the  person  negotiating  the 
same  to  the  lending  institution,  and  be  in- 
dorsed by  such  person    without  limitation; 
otherwise  such  liabilities  in  excess  of  ten  per 
centum  of  the  capital  and  surplus  and  not 
in  excess  of  an  additional  thirty  per  centum, 
must  be  secured  by  collateral  having  an  ascer- 
tained market  value  of  at  least  fifteen  per 
centum  more  than  the  amount  of  liabilities 
secured. 

In  computing  the  total  loans  to  an  individ- 
ual, all  loans  to  any  partnership  or  unincor- 
porated association  of  which  he  is  a  member, 
made  for  his  benefit  or  for  that  of  his  firm, 
shall  be  included.  Loans  to  a  partnership  or 
unincorporated  association  shall  include  all 

[81] 


those  made  for  its  benefit  as  well  as  for  the 
individual  members,  and  in  loans  to  a  cor- 
poration there  shall  be  included  aU  those 
made  for  the  benefit  of  the  corporation. 

Savings  Banks  in  New  York 

By  virtue  of  recent  amendments  to  the 
New  York  banking  laws,  the  deposits  and 
guaranty  fund  and  the  income  derived  there- 
from of  savings  banks  may  be  invested  in 
bankers'  acceptances  and  bills  of  exchange 
of  the  kind  and  maturities  made  eligible  by 
law  for  purchase  in  the  open  market  by 
Federal  reserve  banks,  where  the  same  are 
accepted  by  a  bank,  national  banking  associa- 
tion or  trust  company,  incorporated  under  the 
laws  of  New  York  State  or  under  those  of 
the  United  States,  and  having  its  principal 
place  of  business  in  the  State  of  New  York. 

Limitations  on  Purchases 

Under  this  amendment,  savings  banks  may 
not  invest  in  such  acceptances  more  than 
twenty  per  centum  of  their  assets,  less  the 
amoimt  of  the  available  fund  held  pursuant 
to  the  Banking  Laws  for  the   purpose   of 

[82] 


\ 


paying  withdrawals  in  excess  of  receipts  and 
meetmg  current  expenses,  or  for  the  purpose 
of  awaiting  a  more  favorable  opportunity 

for  investment. 

The  aggregate  liability  of  any  bank,  national 
banking  association  or  trust  company  to  any 
savings  bank  for  acceptances  held  by  and  de- 
posits made  with  the  latter  is  limited  to 
twenty-five  per  centum  of  the  paid-up  capital 
and  surplus  of  such  bank,  national  banking 
association  or  trust  company. 

Not  more  than  five  per  centum  of  the 
aggregate  amount  credited  to  the  depositors 
of  a  savings  bank  may  be  invested  in  the 
acceptances  of  or  deposited  with  a  bank, 
national  banking  association,  or  trust  com- 
pany of  which  a  trustee  of  such  savings  bank 
is  a  director. 

Market  for  Acceptances 

In  New  York,  where  the  largest  open 
market  for  discounts  has  been  established, 
most  of  the  business  is  a  matter  of  trading. 
One  banker  or  broker  calls  up  another  and 
offers  or  inquires  for  a  certain  volume  and 
kind  of  acceptance;  for  mstance,  "$100,000 

[83] 


m 


Guaranty  Trust/'  In  London  the  method 
of  procedure  is  similar,  but  in  Paris  and  other 
cities,  the  buying  and  selling  are  done  in  an 
established  exchange  which  fixes  the  discount 
rates. 

Beginning  of  the  Market  in  New  York 

The  acceptance  business  in  the  United 
States  had  its  actual  beginning  shortly  after 
the  outbreak  of  the  European  War.  When 
the  London  market  had  to  restrict  its  accept- 
ances, owing  to  the  new  conditions  arising 
from  the  war,  the  Guaranty  Trust  Company 
immediately  began  issuing  dollar  letters  of 
credit  payable  in  New  York. 

The  great  diflBculty  at  that  time  was  the 
absence  of  a  market  for  acceptances.  At  first, 
when  bills  were  offered  from  abroad,  drawn 
under  the  Guaranty  Trust  Company's  dollar 
letters  of  credit,  the  Company  itself  had  to 
bid  for  them.  Gradually  other  banks  began 
bidding  and  this  action  resulted  in  lowered 
discount  rates.  Later,  rates  dropped  still 
further  until,  at  the  beginning  of  1915,  the 
ruling  rate  was  from  three  per  centum  to 
three  and  one-half  per  centum.     About  the 

[84] 


> 


game  time,  the  situation  began  to  clear  in 
the  American  money  market.     Bankers  and 
brokers  were  freely  bidding  for  acceptances, 
thus  showing  that  a  discount  market  was 
near  at  hand  and  that  the  only  thing  lacking 
was  the  acceptances.     The  Guaranty  Trust 
Company  supplied  this  deficiency  with  the 
issuance   of  further  acceptance  credits  for 
account  of  its  customers.     The  market  soon 
indicated  that  it  could  absorb  more,  and  the 
result  was  that  the  discount  rate  fell  to  about 
two  and  one-half  per  centum.     A  number  of 
brokers  who  saw  the  possibilities  in  this  new 
line  of  business  advertised  all  over  the  coun- 
try recommending  the  purchase  of  accept- 
ances.   This,  together  with  the  amendments 
to  the  Federal  Reserve  Act  which  have  been 
favorable  to  this  class  of  paper,  has  done 
much  to  develop  the  growth  of  the  accept- 
ance market.    In  this  connection,  the  Sixth 
Annual  Report  of  the  Federal  Reserve  Board 
says : 

"In  its  last  annual  report  the  Board  discussed  the 
subject  of  acceptances  at  length  and  pointed  out  that 
there  was  not  in  this  country  any  broad  acceptance 
market  such  as  exists  in  London.    The  development  of 

[85] 


i«- 


such  a  market  is  necessarily  a  slow  process  and  the  bur- 
den of  its  support  has  fallen  during  the  year  1919,  as  in 
previous  years,  upon  the  Federal  Reserve  Banks.  This 
condition  will  doubtless  continue  until  banks  generally 
begin  to  invest  funds  temporarily  idle  in  acceptances 
and  until  this  method  of  employing  funds  appeals  to  the 
private  investor.  The  Federal  Reserve  Banks  most 
actively  engaged  in  the  purchase  of  acceptances  in  the 
open  market  deemed  it  necessary  in  the  beginning  to 
establish  a  more  favorable  rate  both  for  the  discount 
of  these  bills  for  member  banks  and  for  their  purchase 
in  the  open  market  than  was  established  for  the  discount 
of  commercial  paper.  This  policy  merely  involved  a 
recognition  of  the  high  quality  of  these  credit  mstru- 
ments  and  was  adopted  the  more  readily  in  order  to 
stimulate  the  development  of  a  new  business  with  which 
the  American  bankers  were,  as  a  rule,  unfamiliar  and 
which  was  regarded  as  essential  in  upbuilding  the  Fed- 
eral Reserve  System  and  in  financing  the  foreign  com- 
merce of  the  United  States  by  American  banks  instead 
of  by  foreign  banks. 

"In  estabUshing  preferential  rates  for  acceptances 
recognition  was  given  to  the  fact  that  bills  drawn 
against  actual  shipments  of  commodities  and  accepted 
by  the  strongest  banks  and  bankers  of  the  country  were 
credit  instruments  of  greater  value  and  could  therefore 
command  a  lower  rate  than  the  average  of  commercial 
paper  coming  from  miscellaneous  banks  in  the  ordinary 
course  of  their  discount  operations." 


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[86] 


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